Payday and auto title loans have become more common over the past decade. These loans typically involve small amounts (generally $500 or less) for short periods of time (such as the borrower’s next payday).

An auto title loan is similar, but uses a car title as collateral rather than the post-dated check or access to a checking account required by payday loans. If borrowers are unable to pay back the loan amount in full at the end of the term, they can make an interest-only payment to delay repaying the loan. This process (referred to as a renewal, rollover, or refinance) increases total fees without decreasing the principal of the original loan.

While small-dollar loans can serve a needed role in a community by assisting a borrower experiencing financial difficulty, payday and auto title loans often involve very high interest rates and fees and can increase financial strain for families already burdened. According to Texas Appleseed (a highly respected advocacy group for equal access to justice), depending on the type of loan, the average cost to repay a $500 loan ranges from $600 to $1,274. If an individual refinances a loan, the average total cost can jump to over $3,800! In 2014, Texans borrowed more than $1.6 billion in new loans from payday and auto title lending establishments and paid over $1.4 billion in additional fees.

Texas is classified as a permissive state with little or no regulation of payday loan businesses. Even among permissive states, however, one study found that Texas had the highest costs, at over $23 for every $100 borrowed for a two-week period and close to $234 for every $100 borrowed after refinancing. According to the Texas Fair Lending Alliance, Texans can pay almost double the amount of fees compared to borrowers in other states. The average annual percentage rate (APR) in Texas in 2014 ranged from 242 percent to 617 percent, depending on the type of loan. It is an understatement to say that these rates are significantly higher than other types of short-term lending, such as credit cards which typically have APRs of 12 percent to 30 percent.

To put this issue in perspective, a recent study by found that the average credit card debt in the Dallas-Fort Worth area is close to $4,900. Assuming the borrower could pay 15 percent of their balance off each month, it would take approximately 14 months to pay off the debt and a total of $382 in interest. If this same amount had been taken out as a payday loan (or multiple payday loans of smaller amounts), a borrower would have paid around $1,150 in fees to pay off the loan on-time with no refinances. However, according to the Pew Charitable Trusts, it takes the average payday borrower five months to pay off a payday loan. With refinancing fees, this would mean a borrower could end up paying over $11,000 in fees to borrow the initial $5,000. In other words, a borrower could easily end up spending three to 30 times the amount in fees than they would have paid in interest on a credit card.

Payday and auto title lending have additional costs well beyond the fees associated with the loans. Oftentimes, the fees and short-term due dates cause families to become mired in a cycle of debt where they are paying large amounts on rollover fees but never come any closer to retiring the original loan. Defaults can seriously damage credit, not only making it more difficult to get low-cost loans in the future, but also impairing the ability to find a job or affordable housing since employers and landlords increasingly make decisions based on credit history. In fact, according to the Center for Responsible Lending, one in seven job seekers with “blemished credit” were passed over for a job following a credit check. Also, the community as a whole can suffer as lending drains away resources that would normally be spent in the local economy and causes an added strain on social services from families caught in a cycle of debt.

Recently, there has been a movement among Texas cities to regulate payday and auto title lenders and currently 26 cities in the state of Texas have passed local ordinances, including Austin, Dallas, Houston, and San Antonio. There has also been substantial reform effort in the legislature led by former Speaker of the House Tom Craddick, but to date it has not been successful. Many of the local ordinances require these businesses to register with the city, limit the amount of the loan and the number of refinances allowed, and include a provision that payments should be used to lower the amount of principal owed. Communities are also working to encourage the development of low-cost alternatives to payday and auto title loans. Credit unions, banks, non-profits and even employers have all become involved in the attempt to provide viable alternatives to payday loans through offering micro-consumer loans at reasonable rates.

In addition to city ordinances and alternative loan programs, community education is crucial. Many borrowers are attracted to payday loans because of the advertised ease of access, but do not truly understand the commitment they are making. Borrowers also choose a payday loan because alternatives such as borrowing from family or friends, selling assets, or cutting expenses are viewed as even more unpleasant. Nonetheless, borrowers are often driven to these alternatives in order to pay off the original payday loan. In addition to the debilitating harm to individual families, these lending structures cause a quantifiable drag on the entire economy. One of the best ways to protect families and the economy from abusive loan practices is to raise awareness as to the true costs of these loans as well as the alternatives that exist.