A report from The Pew Charitable Trusts, Payday Lending in America: How Borrowers Choose and Repay Payday Loans, reveals that people choose these loans to avoid outcomes like long-term debt, borrowing from family or friends, overdraft fees and cutting back further on expenses.
But the average loan requires a repayment of more than $400 in two weeks, when the average borrower can only afford $50. When borrowers have trouble paying off the loan, they return to the same choices they initially tried to avoid, according to a survey that led to the report.
The report estimates at least 12 million Americans choose to take out payday loans every day. Previous Pew research shows the average payday loan is $375. Americans spend $7.4 billion per year on the loans, including an average of $520 in interest per borrower who ends up indebted for five months of the year.
Fifty-eight percent of payday loan borrowers have trouble meeting monthly expenses at least half the time. These borrowers are dealing with persistent cash shortfalls rather than temporary emergencies.
Only 14% of borrowers say they can afford to repay an average payday loan out of their monthly budgets.
Seventy-eight percent of borrowers rely on information from lenders - who sell these loans as a safe, two-week product - when choosing to borrow money. This reliance reinforces the perception that payday loans are unlike other forms of credit because they will not create ongoing debt. Yet the stated price tag for a two-week, $375 loan bears little resemblance to the actual $520 cost over the five months of debt that the average user experiences.
While payday loans are often presented as an alternative to overdrafting on a checking account, a majority of borrowers end up paying fees for both.
Some borrowers ultimately turn to the same options they could have used instead of payday loans to finally pay off the loans. Forty-one percent need an outside cash infusion to eliminate payday loan debt including getting help from friends or family, selling or pawning personal possessions, taking out another type of loan, or using a tax refund.
By almost a three-to-one margin, borrowers favor more regulation of payday loans. A majority of borrowers say the loans both take advantage of them and that they provide relief. Despite feeling conflicted about their experiences, borrowers want to change how payday loans work.
"Payday loans are marketed as an appealing short-term option, but that does not reflect reality. Paying them off in just two weeks is unaffordable for most borrowers, who become indebted long-term," said Nick Bourke, Pew's expert on small-dollar loans. "The loans initially provide relief, but they become a hardship. By a three-to-one margin, borrowers want more regulation of these products."
Payday Lending in America: How Borrowers Choose and Repay Payday Loans is the second in a series of reports that will provide research for policymakers as they consider the best ways to ensure a safe and transparent marketplace for small-dollar loans.
Methodology: Pew's survey of payday loan borrowers is a nationally representative telephone poll conducted in two parts. Demographic data is derived from 33,576 responses. The information about borrowers' experiences with payday loans is based on 703 interviews representative of payday loan borrowers.