Study Shows High Default Rates in Payday Lending

By | February 15, 2012

Payday loans are small loans that are often given at a higher than normal interest rate. They are given for very short periods of time, often a few days or a few weeks. Generally, it is only meant to last the consumer until their next paycheck.

A study was recently conducted in North Dakota, and they reported that nearly half of all payday borrowers default on their loans within the first two years of borrowing. Usually, this applies to those who have taken out multiple payday loans within that two year period or simply renewed one of those loans. In fact, more than half defaulted within the first two payday loans that they received, which indicates that those who are using payday loans tend to get in trouble right away.

Consumer Financial Protection Bureau Involvement
The timing of the report is interesting because it came out just a week after the Consumer Financial Protection Bureau released possible reforms to payday regulations. They are proposing that lenders ensure the borrower’s ability to repay the loan, establish a “cooling off” period of 60-days for those who have taken out three loans in a row, and limit short term credits to 45 days or less. They are considering capping fees and interest rates as well.

Many experts agree that the report confirms the needs for these legal changes. It seems like many debtors are unable to dig themselves out of debt once they have taken out their first payday loan. Although the study only includes North Dakota, the researcher in charge of the study indicated that they have no reason to believe that North Dakota’s data would be abnormal when compared to other states.

Effect on Collections
If these new suggestions are implemented, then that could affect how collections agencies do business. Regardless of whether that affect is negative or positive, collections agencies need to be sure that they have a merchant account that can process their payments for them as they come in. Find out more about collections merchants accounts at eMerchantBroker.com.

The idea behind these new regulations is that consumers would default on their loans far less, so collections agencies would not be as relevant in this particular sector of the business. However, they could also be more successful because the payday loan providers are not providing loans to people who cannot pay them back. These people may just need a reminder instead. It is unclear how this will affect collections agencies, but it will definitely affect the type of borrower that payday loans can service.

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