Using public data from the Consumer Financial Protection Bureau, a recent report by the Insight Center for Community Economic Development determined that the high fees and harsh contract terms for payday loans pushed so many people into Chapter 13 bankruptcy in 2011 that they cost the U.S. economy $169 million. Even without the bankruptcies, however, the cost to the economy from these loans was $774 million.

The report sought to determine whether high-interest payday loans are a net gain or drag on the economy. Unfortunately, the conclusion comes as no real surprise — extreme subprime lending sucks money away from that key part of the economy, consumer spending. Worse, California is suffering the most, by far.

According to the CFPB, the average annual interest rate on a payday loan is a whopping 392 percent. Payday lenders justify that high annual interest rate by marketing their services as a short-term fix for people who are only temporarily out of money. But are they?

Not according to this report or a white paper recently released by the CFPB on the same topic. The average payday borrower spends six months of every year in debt to payday lenders, and a third of payday borrowers are stuck in a revolving door, taking out between 11 and 19 such loans ever year. Contrary to the claim that payday loans are primarily temporary, the CFPB found that 75 percent of the interest and fees collected by the payday loan industry were paid by borrowers who had at least 11 loans per year.

In 2011, payday lenders collected some $3.3 billion in interest alone. For every dollar a consumer pays in interest results in a loss to the economy of $1.94 because it cuts back on other consumer spending. By contrast, when payday lenders spend that dollar in interest, it only results in $1.70 of additional economic activity. So, every dollar spent on a payday loan costs the U.S. economy 24 cents. That economic loss totals an estimated $744 million.

In California, payday loans resulted in a drag of $135 million on our economy in 2011 when we could least afford it. The state that took the second-highest loss was Texas, which lost an estimated $95 million.

When consumers are desperate enough to take out a payday loan, that loan is likely to push them into Chapter 13 bankruptcy. A dozen states have already made them illegal.

Source: The Consumerist, “Report Claims Payday Loans Result In Net Loss Of Money, Jobs,” Chris Morran, May 2, 2013