The Consumer Financial Protection Bureau (CFPB) recently released a report on payday, car title, and pawn loans. The report demonstrates that once consumers take out one of these loans, they end up in a cycle of debt that can last a year or more.
The report notes that consumers frequently roll over these loans or take out a new loan soon after re-paying the previous loan. In June 2019, of the consumers who had taken out a loan in the previous six months, 63 percent still owed money on a payday loan; 83 percent still owed money on an auto title loan; and 73 percent still owed money on pawn loans (Figure 1). These loans are typically of short duration — 30 days or fewer for payday and auto title loans — so still owing money suggests repeat borrowing or rollover. In the survey, 48 percent of consumers who had taken out a payday loan in the previous six months had rolled over at least one payday loan in the previous six months. For comparison, 51 percent of all consumers with a credit card in the survey did not pay the full bill in the previous month in June 2019.
The report indicates that 51.8 percent of consumers who had taken out a payday loan in the six months before June 2019 had also taken out a payday loan in the 12 months before June 2020. In the report, the CFPB notes that 32 percent of auto title borrowers in June 2019 had also taken out a loan in the 12 months before June 2020; and 56 percent of pawn borrowers in June 2019 had also taken out a loan in the 12 months before June 2020.
Payday, auto title, and pawn users who experience difficulty paying a bill or expense tend to also use other available credit, suggesting that for some consumers, these loans might be part of a broader and more complicated debt portfolio to deal with difficulties. For users of these loans, getting the money quickly, lack of a credit check, and not wanting “anybody to know that I needed money” were important for deciding on their credit source.
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