How Predatory Debt Traps Threaten Vulnerable Families

Summary

Not long ago, Renee Bergeron—a single mother from Duluth, Minnesota—was between paychecks and took out a small payday loan to help cover her rent. Once her payday came around, Bergeron found—much to her dismay—that she was unable to pay her basic bills and also make her loan repayment. As a result, Bergeron took out another payday loan in order to finance the initial loan. Today, nearly a decade later, Bergeron and her children live in a homeless shelter, and she remains saddled with more than $4,000 in payday loan debt.

Bergeron is just one out of approximately 12 million borrowers who take out such loans each year, according to the Pew Charitable Trusts. Moreover, her experience is not unique—a small payday loan routinely grows into a debt of hundreds or even thousands of dollars.

Payday loans and a closely related product, auto title loans—both heavily advertised and marketed—offer fast cash or quick approval while downplaying the fact that the terms of these loans carry a hefty price. Not only are these types of loans far more expensive than most other financial products—charging interest rates 10 times to 20 times higher than a typical credit card—but rather than serving as a lifeline, they are often a leaky life vest drowning families in debt and sinking them into financial ruin.

Source: Center for American Progress (2016). How Predatory Debt Traps Threaten Vulnerable Families.