Question: What are payday and auto title loans?
The typical payday or auto title loan is a small-dollar, high-cost loan due in full in two weeks to one month. These loans are used primarily for rent, utilities, car payments, or other recurring expenses. Borrowers generally obtain payday and auto title loans by visiting a storefront and providing photo identification, proof and access to a bank account, and some proof of employment.
For most payday loans, borrowers allow lenders to electronically debit their bank accounts for the loan amount plus any associated fees. If the borrower cannot pay back the loan or rollover the loan (paying fees in exchange for additional time to pay back the loan), the lender automatically debits the borrower’s bank account. In the case of an auto title loan, the borrower’s car title is used as the loan collateral, and if the loan is not paid off or extended, the lender may repossess the borrower’s car.
Both payday and auto title loans are extremely costly due to the high fees lenders charge. In Texas, borrowers pay a fee of about $23 for every $100 borrowed. These fees result in an annual percentage rate (APR) of 574% for a typical two-week loan. Because payday and auto title loan fees are so high, many borrowers cannot afford to pay the fees and the entire principal back at once and end up paying additional fees repeatedly to buy themselves more time. Unfortunately, these fees do not reduce the loan principal, which means payday and auto title loans are extremely costly for borrowers.
Question: How are Annual Percentage Rates (APRs) of 500% or more legal?
Usury protections in the Texas Constitution prohibit lenders from charging more than 10% interest unless the Texas Legislature specifically authorizes a higher rate. Payday and auto title businesses have found a way around the constitutional protections by exploiting a legal loophole. Payday and auto title storefronts register as Credit Access Businesses (CABs) under the Credit Services Organization (CSO) Act, broker loans between the borrower and a third party lender, and charge borrowers high fees for arranging and guaranteeing these loans. The third party lender charges interest at or below 10% to avoid licensing under Texas law. CAB fees are completely unregulated and result in APRs over 500%.
Question: What is the cycle of debt?
The high cost and balloon payment structure of payday and auto title loans trap borrowers in an ongoing cycle of debt. Borrowers pay fees and interest on the original loan every two weeks to one month, without ever reducing the principal. This cycle can go on for an extended period of time, resulting in total fee payments that far exceed the original amount borrowed.
Click here for an infographic on how getting a payday loan is analogous to taking a taxi on a cross-country road trip—something anyone would try to avoid!
The high cost of the loans and cycle of debt they create lead to other economic consequences for borrowers:
- Payday borrowers seeking a two-week loan are often kept in debt an average of 199 days or roughly 55% of the year.
- Having a payday loan increases borrowers’ risk of having their bank account involuntarily closed and nearly doubles borrowers’ chances of filing for bankruptcy.
- Credit card users who take out payday loans are 92% more likely to fall behind on their credit card payments.
- A study comparing low- and middle-income households in states with and without payday loans found that those with access to payday loans were more likely to have difficulty paying bills or to delay medical care, dental care, and prescription drug purchases.
- 32% of nonprofit clients requesting charitable financial assistance in Texas are in trouble with a payday or auto title loan.
In short, these loans undermine the financial stability of our families, hurt our local economies, and drain charitable resources.
Question: How much do these loans cost and how does Texas compare to other states?
Texas is one of the few states that has not taken some action to rein in these loans. As a result, payday and auto title loans in Texas cost almost twice as much as they do in other states. For example, while a Texan taking out a $500 payday or auto title loan pays $110 in fees, a borrower in Nebraska pays $75 in fees and a borrower in Florida, $55. In Texas, the credit market is broken; lax oversight and the rapid growth of payday and auto title storefronts have led not to more competition and better products for consumers but to higher-cost loans designed to prevent borrowers from paying them back.
Question: What is a rollover?
Rolling over or refinancing a loan means that the borrower pays a fee to delay paying back the loan. The fee does not reduce the principal owed. For example, if a borrower rolls over a $300 loan in Texas (where fees on the loan are $22 for every $100 borrowed) three times, the borrower will have paid four $66 fees and will still owe $300 to the lender.
Question: How many times can a borrower roll over a loan?
There is no limit on the number of times a borrower can rollover a loan in most cities in Texas. Payday and auto title loans are structured to require full repayment of the loan principal within two to four weeks, but too many borrowers are unable to repay them at the end of that term. In fact, with the average Texas borrower refinancing their loan at least twice, 82% of the volume of payday and auto title loan fees in Texas is a product of refinances.
At least ten Texas municipalities are leading the charge to implement reasonable market standards that address the cycle of debt. They have adopted a model ordinance that ensures that products marketed as short-term loans are structured to be repaid. Under the model ordinance, loans can only be rolled over three times or be made payable in four installments. Additionally, these city ordinances require that each rollover or installment reduce the loan principal by 25% while also limiting the size of the loans based on a borrower’s income.
Question: Won’t additional regulation only restrict borrowers’ freedom of choice?
Absolutely not. Small-dollar loan products serve an important need, but allowing businesses charging excessive fees to dominate the market hurts consumers, damages our communities, and limits the availability of more equitable loan alternatives. A market is healthy when it is sustained by borrower and lender success. The proliferation of payday and auto title businesses only serves to flood the market with debt traps—products that drive borrowers into debt and keep them from attaining financial stability.
Question: Won’t regulation put lenders out of business?
No. Regulating these loan products by capping rates and fees and ensuring the structure of the loans is fair would not put payday and auto title lenders out of business. Other consumer lenders have to comply with rate and fee caps; why are payday and auto title businesses getting special treatment in Texas?
The payday and auto title industry offers loans in other states at lower rates and with smaller fees. Currently, payday and auto title loans cost more in Texas than almost anywhere else in the country. In fact, lenders have advocated for limits in other states that would cap fees at half of what Texans currently pay.
These loans are putting Texas families “out of business,” increasing bankruptcies and straining the social services of our communities.
Question: Don’t people without good credit need payday and auto title loans?
- The vast majority of people in states without payday and auto title lenders do not seek them out. According to a 2013 national survey conducted by the Pew Charitable Trusts, just five out of every 100 would-be borrowers in states without any payday or auto title storefronts chose to take out payday loans online or by other means.
- Furthermore, there is a range of options (see below) available to borrowers other than payday loans that have more favorable terms and do not drive them further into debt.
- 41% of payday loan borrowers need an outside cash infusion to eliminate payday loan debt.
- Further, many borrowers who use payday loans ultimately turn to other alternatives to pay off their loans and many of these alternatives were available to borrowers before they took out their loans.
Question: I need a loan! What other options are there?
- Better alternatives exist. They include the following:
- Family and friends. It can be difficult or embarrassing to ask family and friends for assistance when you are in a financial bind. However, by doing so, borrowers can avoid the high fees and spiraling debt that come with payday and auto title loans.
- Advances from employers. Some employers grant paycheck advances to employees. Because this is a true advance and not a loan, there is no interest charged making it far less costly than a payday or auto title loan.
- Utility assistance. Some utilities will work with customers to help pay their bills through a delayed payment plan.
- Payment with creditors. Try to deal directly with your creditors. Some creditors will negotiate partial payments or smaller payments on outstanding bills.
- Cash advance on credit cards. Credit card cash advances, with APRs around 30%, are substantially cheaper than payday and auto title loans, with APRs ranging from 300% to 700%.
- Loans from licensed consumer lenders, credit unions, or banks with APRs between 18% and 90% are better options. In addition, licensed consumer lenders as well as credit unions often lend to people with credit problems.
- There are also tools to help build emergency savings. Visit www.texassaves.org to learn about low or no-cost savings accounts in your community and to get helpful savings tips. Saving as little as $10 a month can help you build for the future.
Question: How do payday and auto title businesses impact local economies?
- Inflated fees on payday and auto title loans undermine local economies. Money spent getting out of these loans is money not spent in the community on valuable goods and services. Bankruptcies, lost bank accounts, and unpaid bills further drain local economies.
- Families struggling with payday and auto title loan debt drain the limited resources of faith-based and other local charities. The demand for financial assistance far exceeds their capacity to help families cover rent, utilities, or medical bills.
- For every Texan employed by this industry, many more Texans are struggling after using one of its loan products. The high APRs and recurring fees most borrowers pay on their loans are to blame.
Question: What can I do about it?
- Encourage your city to pass an ordinance like those of other cities in Texas. See here for more details on what meaningful ordinances look like: http://www.tml.org/payday-updates.
- Contact your legislator (http://www.capitol.state.tx.us/Resources/contactText.aspx)! The Texas Fair Lending Alliance and its partners want to see meaningful statewide legislative reform. Unfortunately, the Texas Legislature failed to enact any rules that would regulate payday and auto title lenders during the 2013 legislative session. Tell your state and federal Representatives and Senators how important you think it is for them to end predatory payday and auto title lending in our state and let them know that inaction is unacceptable.
- Share your story: Telling your story can help us change the hearts and minds of legislators and the public at large.
- Sharing your story via video makes a huge difference.
- Like us on Facebook (https://www.facebook.com/TexasFairLendingAlliance) and follow us on Twitter (@txfairlending). Let your friends and family know about this important issue and stay up to date on all the latest news and research.
- Spread the word. Educate others about how payday and auto title lending are harming Texans.
Question: What sort of changes does the Texas Fair Lending Alliance support?
- The bottom line is that payday and auto title lending companies can make a fair profit and consumers can access fair credit when:
- The number of allowable loan rollovers is limited; payments actually reduce the loan principal; and borrower capacity to repay is evaluated before loans are issued.
- Basic standards for affordable credit are enforced. 500% APRs and high recurring fees should not be permitted.
 Office of Consumer Credit Commissioner, Credit Access Business Quarterly Reporting 1st Quarter, Calender Year 2012 (2013) at 1.
 See, e.g., Dennis Campbell, Asis Martinez Jerez, & Peter Tufano, Bouncing out of the Banking System: An Empirical Analysis of Involuntary Bank Account Closures, Harvard Business School (2008) at 27.
 See Sumit Agarwal, Paige Marta Skiba, and Jeremy Tobacman, Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?, National Bureau of Economic Research, Vanderbilt University Law School, and University of Pennsylvania (2009) at 7.
 Brian T. Melzer, The Real Costs of Credit Access: Evidence from the Payday Lending Market, Northwestern University (2009) at 3,18.
 Pew Charitable Trusts, Payday Lending in America: Who Borrows, Where They Borrow, and Why (2012) at 9.
 Uriah King and Leslie Parrish, Payday Loan, Inc.: Short on Credit, Long on Debt, Center for Responsible Lending, (2011) at 1; See also Office of Consumer Credit Commissioner, Credit Access Business Annual Data Report Calendar Year 2012 (2013) at 1.
 See Susanna Montezemolo, Payday Lending Abuses and Predatory Practices, Center for Responsible Lending (2013) at 24, 26 where total fees were calculated by using the median rate charged by storefront lenders and refinancing fees were calculated expansively by combining the number of loan renewals with new loans taken out within two weeks of paying back an old loan.
 Mark Price and Stephen Herzenberg, Bankrupt by Design: Payday Lenders Target Pennsylvania Families, Keystone Research Center (2012) at2.
 Pew Charitable Trusts, Payday Lending in America: How Borrowers Choose and Repay Payday Loans (2013) at 8.
 Id. at 7
 Id. at 36. 19 percent of borrowers surveyed in the Pew Charitable Trusts report received help from family or friends to pay back the loans.