The Center for Responsible Lending (CRL), in a recent study of payday lending in North Dakota, found that nearly half of all borrowers default on a loan within their first two years of borrowing.

The study states of the 46% defaulting within two years, half defaulted within the first two payday loans they borrowed, indicating it isn’t taking long for borrowers to get into trouble, according to CRL Senior Policy Researcher Susanna Montezemolo. 

The CRL used data from North Dakota because it has a database that tracks each borrower in the state. Montezemolo said the study supports arguments that the ability to repay standard loans should to be required for every payday loan.

"This report shows a high default rate on payday loans even though lenders are first in line to be paid, a clear sign that a borrower is unable to escape the debt trap once lured in by an initial payday loan. We have no reason to think North Dakota is any different from any other state that doesn’t regulate payday lenders,” Montezemolo said.

The Consumer Financial Protection Bureau released its framework last week for payday loan regulation, which proposed letting lenders chose between two different sets of rules. One would prevent the borrower from getting stuck in a debt trap by forcing lenders to determine a borrower’s ability to repay before issuing a loan. The other would protect lenders after they have taken out a payday loan from getting trapped in fees and being unable to pay off the loan if they defaulted.   The CRL warned that there also are “invisible" ways borrowers can default on a payday loan such as when a check written to the payday lender goes through but results in an overdraft or non-sufficient funds fee. The CRL said invisible defaults, which one-third of all borrowers experience, mask the true default rate and make triple-digit interest rate loans even more expensive for consumers. 


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