Payday Loans at 400% APR: Rollovers, Texas Hot Checks and Wonga's Fall

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Payday loans are secured by first claim on a borrower's next paycheck, once through a post-dated check and now by electronic withdrawal, at APRs that can legally reach 400 percent in some places. Consumer agencies call it a market failure: borrowers in distress are price inelastic, so lenders charge the legal maximum, while adverse selection and fixed origination costs keep fees high and make rollovers central to the business. FDIC and Pew Charitable Trusts data show the heaviest use among people without four-year degrees, renters, African Americans, separated or divorced people and those earning under $40,000, and Pew found 69 percent of loans cover recurring costs like rent, utilities and groceries, with the average borrower in debt about five months a year.

Yet pure payday lenders average profit margins of about 3.57 percent, and the industry notes that a 20 percent APR on a one-week $100 loan earns 38 cents. One study found disaster areas served by payday lenders had fewer foreclosures and lower addiction treatment rates. Regulation varies widely. After Wonga was caught sending letters from nonexistent law firms, the UK capped costs at 0.8 percent a day and 100 percent in total; Australia set an equivalent 48 percent APR cap; in the U.S., 27 states allow the loans, nine restrict them and 14 plus Washington, D.C. forbid them, while the Military Lending Act caps loans to service members at 36 percent. Reformers propose reviving postal banking, which the U.S. ran until 1967.

• Google banned ads for loans above 36 percent APR or with terms under 60 days.
• Some Texas lenders had borrowers date checks for the day of the loan, then used them to threaten hot check charges.
• The Insight Center found payday lending pulls hundreds of millions of dollars a year from low-income communities.
• Regulatory scrutiny pushed banks like Wells Fargo to drop deposit advance programs charging the equivalent of 120 percent APR.
• The Pentagon backed the military cap because debt spirals were costing soldiers their security clearances.