Borrowers use payday loans for ordinary expenses not financial emergencies, says study
Pew researchers have found that most borrowers who take out payday loans use them to cover ordinary living expenses, not unexpected emergencies -- a finding that contradicts industry advertising that emphasizes payday loans as short-term options to cover financial emergencies.
According to a new report "Who Borrows, Where They Borrow and Why,’’ the average borrower takes out a payday loan of $375 and renews it eight times before paying it off, spending about $520 on interest. Sixty-nine percent of survey respondents said the first time they took out a payday loan, it was to pay a recurring expense, such as rent, utilities, credit card bills, mortgage payments or food. Just 16 percent said they paid for a car repair or emergency medical expense.
“Thus it seems that the payday loan industry is selling a product that few people use as designed and that imposes debt that is consistently more costly and longer lasting than advertised,’’ the report concluded.
The report was released Wednesday in advance of the one-year anniversary of the creation of the Consumer Financial Protection Bureau by Congress to regulate the lending industry, including payday loans, said Nick Bourke, director of Pew’s Safe Credit Cards Project and the Safe Small Dollar Loans Research Project.
"There is some concern at the state level and at the federal level that consumer protections, which result in no payday loan storefronts, could be driving people to potentially more harmful resources, including online payday loans,’’ Bourke said. “We found that that’s not the case. Based on our research, in states that restrict storefront payday lending, 95 of 100 would-be borrowers elect not to use payday loans at all. Just five borrowers out of 100 have chosen to go online or elsewhere in those states where storefronts are not available.’’
Pew’s telephone survey found that 5.5 percent of American adults have used a payday loan in the past five years, with three-fourths of them using storefront lenders rather than payday loan websites, which often have higher loan caps and higher interest rates. Payday loan borrowers spend approximately $7.4 billion annually at 20,000 storefronts, hundreds of websites and a growing number of banks. In 2010, 12 million Americans used a storefront or online payday loan.
Laws 'permissive' in Missouri
The report described Missouri as having "permissive” state laws regarding payday loans: Single-repayment payday loans are permitted with finance charges and interest not to exceed 75 percent of the borrowed principal. Payday loans in the state are capped at $500.
In contrast, Florida permits single-repayment payday loans with fees of 10 percent of the borrowed principal, plus a $5 fee for borrower verification with a state database of payday loan users. Loans are available for up to $500 and each borrower may have only one payday loan at a given time.
The report found that in states that enact strong legal protections the result is a large net decrease in payday loan usage and that borrowers are not driven to seek payday loans online or from other sources.
Missouri legislators have wrangled repeatedly over attempts to regulate the payday loan industry in the state. Proponents have petitioned for a Nov. 4 ballot initiative to cap the annual percentage rate on short-term loans.
Some other key findings of the Pew report:
- Most payday loans borrowers are white, female, ages 25 to 44.
- Groups more likely to have used a payday loan include: those without a four-year college degree, renters, African Americans, people earning below $40,000 annually and people who are separated or divorced.
- If faced with a cash shortfall and payday loans were unavailable, 81 percent of borrowers said they would cut back on expenses, delay paying some bills, rely on friends and family or sell possessions. Just 44 percent said they would take a loan from a bank or credit union, and just 37 percent would use a credit card.
Bourke said that interviews with borrowers about their payday loan experiences found that they often turned to the same techniques to pay them off as they would have used had payday loans not been available: cutting their expenses, borrowing from family and friends, selling or pawning possessions.