The numbers are out and they’re startling. Every year, 12 million Americans spend approximately $7.4 billion on payday loans. Borrowers take out, on average, eight loans over the course of a year, each at around $375.
The new report, compiled by the Pew Center, finally sheds light on a specific sector that isn’t always included in various financial reports. It’s the first one in a series titled Pew’s Payday Lending in America and the goal is to delve into various reasons as to why these financial products are popular, who the borrowers are in terms of demographics and whether or not these loans are their only options.
Other findings included around 5.5% of adults in the U.S. have used a payday lending company at some point over the past five years. A full 75% of those borrowers looked to their community “brick and mortar” company instead of turning to online loan products. On those eight $375 loans, they pay around $520 in interest.
The Snapshot
The typical payday loan borrower is a white female between the ages of 25 to 44 years old. The study also found five core groups with higher odds of using these particular products. These include people without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced. A lower income is almost always present, even in spite of or because of any other factors present. It stands to reason, then, that low-income homeowners are less prone to usage than higher-income renters: 8 percent of renters earning $40,000 to $100,000 have used payday loans, compared with 6 percent of homeowners earning $15,000 up to $40,000.
Customers who turn to these loans also don’t have access to cash advances from their credit cards. This reveals a lot about the lack of options for lower income consumers. Also, the first time people took out a payday loan, nearly 70% of them used to cover a credit card bill, utilities or to pay rent. Another 15% used the funds for the emergencies that popped up, such as a car repair or medical expense.
Where the Money Goes
The next objective of the study was to discern where the money is spent after the loan is taken out. Not surprisingly most people use the funds to cover household expenses from month to month. Utility bills, rent, groceries and other similar expenses. The products were designed for unexpected emergencies that result in a tough financial week; instead, they’re being used for longer term expenses in tough financial months – which could explain the many renewals and therefore, the high interest payments. Most borrowers, on average, roll these loans over for around five months.
So what would happen if these loan products were suddenly not available? Of those surveyed, most would allow another bill go unpaid or would cut back on other expenses. A fair number would borrow the money from friends or family and a lower percentage would sell or pawn personal possessions. The one thing most would not do, however, is turn to a credit card; this was due exclusively to the respondents not having access to a credit card.
The Pew Center is expected to release periodical reports on how this particular sector evolves in the coming years as well as how much or how little consumers view these companies.
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