Why borrowers use payday loans
People use payday loans to avoid borrowing from family and friends and to avoid further reducing their expenses. But they often end up doing these things anyway to pay off the loan, according to a new report.
The average payday loan – a short-term, high-interest loan usually secured by a borrower’s future salary – requires repayment of more than $ 400 in two weeks, according to a new report from a branch of the Pews Charitable Trusts. But the average borrower can only afford a payment of $ 50, which means borrowers end up renewing the loan and increasing their debt. The Pew Report found that borrowers typically experience extended periods of debt, paying more than $ 500 in fees over five months.
About 41% of borrowers say they need a cash injection to pay off their payday loan debt. Typically, they get the money from sources they tried to avoid in the first place, such as family and friends, selling or pawning personal items, taking out some other kind of money. loan or use of a tax refund.
“Payday loans are touted as an attractive short-term option, but that doesn’t reflect reality. Paying them off in just two weeks is unaffordable for most borrowers, who take on long-term debt, ”Nick Bourke, Pew’s small loan expert, said in a statement.
The Community Financial Services Association of America, a group representing payday lenders, argued that the Pew report lacked context. “Short-term credit products are an important financial tool for people who need funds to pay for an unforeseen expense or to manage a shortfall between paychecks,” the association said in a statement. “In our current economy and tight credit market,” the statement continued, “it is essential that consumers have the credit options they need to face their financial challenges.” Typical fees charged by association members, according to the release, are $ 10 to $ 15 for every $ 100 borrowed.
Payday loans and similar “bank deposit advance” loans, which are secured by direct deposit to a bank account, are increasingly monitored by federal regulators.
Once confined to storefront operations, payday lenders are increasingly operating online. Last week, the New York Times reported that major banks, such as JP Morgan Chase, Bank of America and Wells Fargo, have become behind-the-scenes allies for online lenders. The big banks don’t make loans, but they do allow lenders to collect payments through electronic transactions.
(On Tuesday, however, Jamie Dimon, the managing director of JPMorgan Chase, vowed to change the way the bank deals with internet lenders who automatically withdraw payments from borrowers’ checking accounts.)
Loans are generally considered to be useful for unforeseen bills or emergencies. But the Pew Report found that most payday borrowers face persistent cash shortages, rather than temporary expenses. Only 14% of borrowers say they can afford to pay off an average payday loan from their monthly budget.
The results are based on a telephone survey as well as focus groups. Information on borrowers’ experiences with payday loans is based on interviews with 703 borrowers. The margin of sampling error is plus or minus 4 percentage points.
Although borrowers complained that they had difficulty repaying loans, most agreed that the terms of the loans were clear. So why do they use such loans? Desperation, according to the report: “More than a third of borrowers say they have been in such a difficult situation that they would accept a payday loan on any terms offered.
Have you ever used a payday loan? How did you repay it?