The realities of payday loan usage don’t match the marketing messages sent by payday loan providers, according to a recent report from the Pew Charitable Trusts (Pew). Payday Lending in America: Who Borrows, Where They Borrow, and Why uses data from state-level financial regulators, a nationally representative telephone survey, and a series of focus groups to examine the financial behavior and demographic characteristics of payday loan borrowers.
A payday loan is a short-term loan that is secured by the borrower’s next paycheck. The loans typically have terms of about two weeks, feature high APRs (annual percentage rates), and carry large late-payment fees. Payday loan providers tend to advertise their products as a short-lived means of covering an unexpected financial need. But regulatory data cited in the Pew report show that, on average, a payday loan borrower takes out eight loans in a year, often renewing an existing loan or taking out a new loan shortly after repaying the previous one. Each loan term lasts an average of 18 days, leaving the borrower indebted to the lender for a total of five months a year. Furthermore, most borrowers use payday loans to cover regular, ongoing expenses, not financial emergencies. In Pew’s telephone survey, 69 percent of respondents reported taking out their first payday loan to cover recurring expenses, such as utilities, food, or rent. Only 16 percent reported taking out their first payday loan to cover an unexpected expense, such as a car repair or medical bill.
According to the report, approximately 12 million Americans a year take out payday loans. More than half of borrowers are white, more than half are female, and more than half are 25–44 years old. However, after controlling for other characteristics, the report’s authors identified five groups that are at least 50 percent more likely than others to take out payday loans: African Americans, those who are separated or divorced, those with less than a four-year college degree, those earning less than $40,000 a year, and those who rent their homes.
To access the report, visit www.pewtrusts.org/small-loans.