Why Banks Love Payday Loans. And Why You Should Hate Them.

Most of us know that payday loans are a bad deal for the borrower but a new study by the Consumer Financial Protection Bureau (CFPB) shows that they're even worse than we thought.

Payday loans are short-term, high-interest loans where the borrower promises to repay the loan from the proceeds of a future paycheck. So when the next paycheck comes, you have to pay. Meaning that you are more likely to want to take out another payday loan to stay on top of your expenses. You get caught in a vicious circle.

It would be bad enough if you only had to pay back the amount you borrowed. But what really keeps you stuck is the incredibly high interest rates lenders are allowed to charge on payday loans. Fees of 15% on a two-week loan are common. These are the kind of rates you see mobsters charge in movies and on TV.

The CFPB study reviewed 12 million payday loans over a twelve-month period. The study found that more than 80% of payday loans are rolled over or renewed, even in States that have laws that try to restrict roll-overs. And the average payday loan borrower is likely to stay in debt for 11 months or longer, meaning they're paying far much more in fees than the amount of the original loan.

It's a debt trap. At least the big banks are cutting back on the practice. But smart borrowers will take heed and stay away from the payday lender.

About the author: Dan Cooke

Image credit: Gilbert Gibson