Despite consumer protection, payday loan consumers are given high rollover fees: CFPB

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Payday lenders provide 255 loans of a small amount that are repayable in one lump-sum installment, usually at the time of the borrower’s next payday. Although they may provide rapid financing without having to pass a credit check they usually make consumers fall into the cycle of debt because of the short-term repayment and the high APR.

Of those 26 states which have a law that allows payday loans 16 states require lenders to offer extended payment plans in order to discourage the re-borrowing. However, even in states that have enacted these consumer protections, payday loan customers have to pay high fees for rollovers in accordance with the latest report by the Consumer Financial Protection Bureau (CFPB).

Extended payment plans may help save money for borrowers however, many do not use them.

If the borrower isn’t able to pay off the payday loan and is in a position to do so, they have a couple of options: they can rollover their loan for a further two weeks, default on their loan, or enroll in an extended repayment plan or at least within the states of 16 that have the program.

In the case of credit of $300, the borrowers will save money when they use an extension of their payment instead of simply rolling the loan. It is estimated by the CFPB believes that an individual will pay the cost of $360 for a period of four months, as opposed to a one-time fee of $45 for a payment plan that is extended.

Despite the obvious advantages the extended repayment plan has, however, usage rates in states that provide this option are much less than the rates for payday loan rollovers. Also, people who borrowed money on payday were more likely to roll over their loans, rather than opt for extended repayment plans.

In fact in Wisconsin, the rollover rate was 16.4 percent in Wisconsin this year, in contrast to the extended plan use rate of 2.2%. Only 0.4 percent of payday customers in Florida use extensions to their payment plans in comparison to more than 25% (26 percent) holding 10 or more loans.

Certain eligibility requirements could lead to lower extended payment plan rates of use

One reason for the lack of utilization of these plans could be “a substantial variation in eligibility requirements” payday loan applicants are required to comply with state regulations according to the CFPB discovered.

The law in Alaska requires that borrowers be able to pay back 5 percent of the balance on their loan before they are eligible for an extension of a payment plan. Utah permits lenders to charge an initial 20% payment when a borrower is enrolled in an extended plan of payment following having defaulted.

In Florida the state of Florida, borrowers are required to be enrolled in credit counseling to get an extended grace time. This could create a lengthy obstacle for those who are concerned about not making an installment on their loan.

Only seven of the states that require extended repayment plans require banks to notify the borrower aware of this option prior to taking out the loan. In most states, borrowers may only avail only one extended repayment option in the course of a 12-month period.

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