The Cumulative Costs of Predatory Practices

is, because these types of loans are not underwritten for the ability of borrowers to repay the loan
and afford essential expenditures, most borrowers run out of money after repaying a loan and
quickly need to take out another loan, re-borrowing the principal and paying the high fee over
and over again.
A long period of indebtedness compared with a short
stated loan term or a high number of loans taken out per
year indicate the presence of a debt trap. Payday loans,
car-title loans, bank payday loans, and overdraft loans all
display these hallmarks. For example, borrowers pay at
least $2.6 billion annually as a direct result of churning
payday loans (Montezemolo, 2013a).5
Borrowers pay at least $2.6 billion
annually as a direct result of
churning payday loans.
Because of data limitations, we have not been able to calculate a direct estimate of the cost of loan
churn for other debt-trap products, although analysis shows that the debt trap exists for significant
segments of consumers. For example, car-title borrowers at one lender typically took out nine highcost
loans per year with a typical term of 30 days (Montezemolo, 2013b). Also, more than one-third
of borrowers with bank payday loans took out more than 20 loans in a year (Borné & Smith, 2013a).
For an important segment of checking account customers, overdraft products are a debt trap: Nearly
2 million accountholders pay 20 or more overdraft fees in a single year (Borné & Smith, 2013b).
Costs for Valueless Services
Consumer costs can also arise from borrowers paying for or financing the cost of something that
does not provide the advertised benefit. For example, CFPB has brought seven enforcement actions
against lenders and banks that pushed borrowers to pay for credit monitoring, account protection,
insurance, and other add-on products that did not provide consumer benefit (CFPB, 2014b).
Similarly, consumers are saddled with costs by debt-settlement firms and for-profit colleges, but
in too many cases are left with little to show for it.
In the case of debt settlement, the debt-settlement company must settle more than 50% of the
consumer’s debts to produce a financial benefit that exceeds the costs of the program (Parrish &
Harnick, 2014). When companies fail to settle enough debts, consumers incur a net cost.6 This
costs ranges, on average, from $1,000 to $10,000 per consumer, depending on how many debts
are settled (Parrish & Harnick, 2014).
Similarly, students at for-profit colleges finance above-average tuition with the promise of improved
job prospects and increased income that come from earning a degree. However, many of the programs
are very poor quality, and less than one-third of students at four-year, for-profit schools graduate
(Parrish & Smith, 2014b). Even graduates may not see the promised job and income benefits
touted by the school. A recent CFPB lawsuit against one of the nation’s largest for-profit colleges
alleges that the school “lured tens of thousands of students to take out private loans to cover expensive
tuition costs by advertising bogus job prospects and career services” and then “used illegal debt
collection tactics to strong-arm students into paying back those loans while still in school”
(CFPB, 2014c).
5 The $2.6 billion figure includes only interest paid for loans taken out within 2 weeks of having paid off another loan. In total,
borrowers pay $3.4 billion in payday loan fees annually.
6 By "incur a net cost," we mean that consumers pay more in added fees and interest than they receive as a benefit in the form of
written-off debt.
Center for Responsible Lending 11