Cycle of Debt
The high cost and structure of payday and auto title loans trap borrowers in a cycle of debt where they continually pay fees and interest — never paying down the loan. In spite of the short initial term of the loan, borrowers can be stuck paying high fees for months on end. It does not take long for the fees to add up to a damaging cycle of debt.
What is the Cycle of Debt?
Julia, who works in an elementary school cafeteria, got a $500 fast cash payday advance because she was short on money for rent — she left the store with $500 in her pocket and a loan for $615 (the first $115 fee is rolled into the loan principal amount). At the end of two weeks, she went back to the loan store. She didn’t have the full $615 she owed, so she paid a $115 fee to roll over the loan for two more weeks. Because money is tight, many working Texans, just like Julia, rollover a loan 6 times on average and end up paying $1,400 or more for what started as a $500 two-week loan.
Under current Texas law, there is no limit to the fees that payday and auto title loan businesses can charge and no limit on the number of times they can charge high fees for essentially the same loan. Loans marketed as “installment loans” by payday and auto title loan operations are no better. Each payment includes high fees, which make the loan difficult to pay off. Auto title loans are similar to payday loans, but the amount loaned is generally higher and borrowers who fail to make a payment could lose their vehicle, often their only means to get to work and take kids to school.
The high cost of the loans and cycle of debt they create lead to other economic consequences for borrowers:
Payday and auto title loan borrowers seeking a two-week to one-month loan refinance 6 to 8 times on average. For installment payday and auto title loans, there are an average of 4 to 5 refinances, and half of borrowers are indebted to the loans for one year or longer.
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.
These loans undermine the financial stability of our families, hurt our local economies, and drain charitable resources.