09/25/2012 - Payday loans, which may look like a quick, easy answer to cash-flow problems, actually cost borrowers far more than anticipated because the loans often take months to repay, according to a survey by Pew’s Safe Small-Dollar Loans Research Project.
“The way a payday loan is packaged—as a short-term solution for unexpected expenses—is a problem,” said project director Nick Bourke. “We found that consumers are in debt on average for five months. The loans can be challenging because the borrower either must pay in full on the next payday or submit another fee to move the due date forward two weeks.”
The report, Payday Lending in America: Who Borrows, Where They Borrow, and Why, found that Americans spend $7.4 billion on such loans annually. Of the 5.5 percent of adults who used payday loans in the past five years, three-fourths went to storefront lenders and nearly one-fourth went online. Sixty-nine percent of first-time borrowers used the loans for paying utility and credit card bills and other recurring expenses. Payday Lending surveyed nearly 50,000 adults in the continental United States over nine months to get a representative sample and convened 10 focus groups.
“We gained a lot of insight into how people manage their finances and what they think about borrowing,” Bourke said. “A lot of people who have been struggling financially become familiar with credit cards, student loans and other debt and are skeptical of taking on more. That’s one reason they chose a payday loan—the promise of a short-term solution. Most often, that’s not the result.”
The report comes at an important time because the Consumer Financial Protection Bureau has been tasked with creating a national policy on payday loans. Pew project staff has met with the bureau about the findings and plans other reports.
To learn more, go to www.pewtrusts.org/small-loans.