Payday loans cost the U.S. economy nearly $1 billion and thousands of jobs in 2011, according to a report from the Insight Center for Community Economic Development.

The study says that the burden of repaying the loans resulted in $774 million in lost consumer spending and 14,000 job losses. Bankruptcies related to payday loans numbered 56,230, taking an additional $169 million out of the economy.

"Payday loans are an ongoing problem and an economic drain," said Tim Lohrentz, the center's program manager and author of the report. "The amount is not huge in the big picture of the total economy, but it's big enough."

Designed to meet the need for emergency cash, the short-term loans are essentially advances on wages and meant to be repaid on the next payday—usually within two weeks. Borrowers secure the loans by providing a postdated check or electronic access to their bank account.

But the loans, which have been around for nearly 20 years, carry onerous interest rates, ranging from 200 percent to 500 percent.

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Data collected by Pew Charitable Trust show that the average payday borrower takes out eight loans a year. On an average loan size of $375, borrowers pay about $520 in interest. According to Pew, the average payday borrower can repay only $100 a month.

Though most payday lenders are storefront or Web operations, major banks also have been players, even if indirectly.

Bank of America, Wells Fargo and JPMorgan Chase have allowed payday lenders to withdraw funds owed by borrowers who are bank customers, including in states such as New York, where payday loans are banned.

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JPMorgan has stated publicly that at the end of May it will give customers more power to stop the withdrawals and close their accounts.

"The practice is terrible," JPMorgan CEO Jamie Dimon said at an investor meeting in February.
Some, including U.S. Bank, Fifth Third Bank and Wells Fargo, offer payday loans under names such as Ready Advance, Fast Loan and Early Access, according to the Center for Responsible Lending (CRL). They can carry interest rates averaging between 225 and 300 percent, CRL said.

Over a third of bank customers took out more than 20 payday-type loans in 2011, and those borrowers are two times as likely as other bank customers to incur overdraft fees, CRL said. Over a quarter of bank payday borrowers were Social Security recipients, it noted.

"What's really insidious about this is that people keep taking out loans to pay off the old loans," Lohrentz said. "Fees from high interest rates and bank overdrafts become more costly than the actual value of the loans."

Payday loans have been under close government scrutiny, particular because of their interest rates.

Thirty-three states allow payday lending, but fifteen have banned them. No state has authorized them since 2005, and Congress in 2007 restricted such lenders from targeting members of the armed services.

The Consumer Financial Protection Bureau recently accused payday lenders of "trapping borrowers in a cycle of debt" and said it may reform rules for short-term loans. Proposals include requiring banks to assess borrowers' repayment ability and a "cooling off" period between loans.

Meanwhile, Sen. Dick Durbin (D-Ill.) and several other Democrats have offered a bill to set an interest rate and fee limit of 36 percent on all open- and closed-end consumer credit transactions.
States that permit payday lending are also taking a harder look. Arkansas, Arizona, New Hampshire, Ohio, Oregon and Montana and Texas have enacted reforms to cap interest rates or are considering such measures.

"The situation seems to be getting better, and I think the increased spotlight on the issue is helping," Lohrentz said. "But more has to be done."
To escape the spotlight and regulations, many payday lenders have moved offshore, to places such as Belize and Malta, and going online.

Three million Americans obtained an Internet payday loan in 2010, according to Pew. By 2016, online payday loans will account for 60 percent of the loans, according to analyst John Hecht of investment bank Stephens Inc.

Even with the high interest rates, the loans are popular. Some 12 million Americans use a storefront or online payday loan each year, according to Pew.

Lohrentz suggested a more traditional way of getting needed cash.

"Some of the desire for them has to do with the slow economy and the need for immediate gratification," Lohrenetz said. "But it might be best for people to go back to borrowing from family or friends instead of payday loans. It's probably embarrassing to ask, but you would save yourself a lot of money."

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