Payday Loan Facts

Nearly 6% Have Used Payday Loans, Study Finds



Pew Safe Small-Dollar Loans Research ProjectReason for first loan

Nearly 6 percent of adults nationwide have used payday loans in the last five years, and they mostly use them to cover everyday expenses, not emergencies, according to a new report from an arm of the Pew Charitable Trusts.

The report, from Pew’s Safe Small Dollar Loans Research Project, is based in part on a large survey that found that 12 million Americans used a payday loan in 2010.

Payday loans are getting more scrutiny from regulators, including the Consumer Financial Protection Bureau, as more traditional banks and online lenders begin offering the short-term, small-amount loans in addition to storefront lenders.

Payday borrowing is concentrated among younger, low-to-moderate income individuals, the report found, but people of most ages and incomes use payday loans. Among the borrowers most likely to use them are those who lack a four-year college degree; African-Americans; renters, rather than homeowners; those earning less than $40,000 annually; or those who are separated or divorced.

Three-fourths of payday borrowers use storefront lenders, and about a quarter borrow online, the study found. Borrowers take out eight payday loans a year, spending about $520 on interest with an average loan size of $375. Lenders usually charge about $15 for each $100 borrowed per two weeks — the equivalent of a 391 percent annual percentage rate. The loans are secured by a postdated check, or an electronic debit authorization.

Collectively, payday loan borrowers spend about $7.4 billion annually at storefronts, Web sites and, increasingly, banks.

Pew says the survey is the first-ever nationally representative telephone poll of payday loan recipients about their borrowing.

The initial phase of the survey identifying payday loan borrowers was conducted among nearly 50,000 adults from August 2011 to December 2011 and has a margin of sampling error of less than 1 percentage point. A 20-minute telephone survey was then conducted from December 2011 to March 2012 among 451 storefront payday loan borrowers, with a margin of sampling error of plus or minus 5 percentage points.

The loans are marketed as two-week credit offerings to help meet unexpected expenses, like a car repair or a medical emergency. But most borrowers use the loans to cover ordinary living expenses, and remain indebted for an average of five months per year, the study found. The first time people took out a payday loan, 69 percent used it to cover a recurring cost, like utilities, credit card bills, rent or food. Just 16 percent used it for an unexpected expense.

“That looks like a real problem to us,” said Nick Bourke, director of Pew’s small-dollar loan project. The report, and others that will follow, should help inform the discussion about whether and how to regulate payday lending, he said.

The report says a typical payday borrower is someone like “Deborah,” a teacher, mother and graduate student struggling to afford her monthly bills and her daughter’s routine vaccinations. (Deborah was a member of a focus group convened for the study.) She didn’t want to ask friends, so she borrowed a couple of hundred dollars from a payday lender. The loan was due on her next payday, but she didn’t have enough funds to meet her regular bills and repay the loan. She ended up renewing the loan for six months, until her income tax refund arrived.

Pew researchers conclude that the findings “raise serious concerns” about payday lending, including “whether a two-week product with an A.P.R. typically around 400 percent is a viable solution for people dealing with a chronic cash shortage.”