How Borrowers Choose and Repay Payday Loans

Feb 20, 2013

For someone in need of quick cash, a payday loan can look like a way to avoid asking loved ones for help or getting into long-term debt. But these loans usually prove unaffordable, leaving borrowers in debt for an average of five months.

This report—the second in Pew’s Payday Lending in America series—answers questions about why borrowers choose payday loans, how they ultimately repay the loans, and how they feel about their experiences.

Key findings include:

1. 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.

2. Only 14 percent of borrowers can afford enough out of their monthly budgets to repay an average payday loan. 

The average borrower can afford to pay $50 per two weeks to a payday lender—similar to the fee for renewing a typical payday or bank deposit advance loan—but only 14 percent can afford the more than $400 needed to pay off the full amount of these non-amortizing loans. These data help explain why most borrowers renew or re-borrow rather than repay their loans in full, and why administrative data show that 76 percent of loans are renewals or quick re-borrows while loan loss rates are only 3 percent.

3. The choice to use payday loans is largely driven by unrealistic expectations and by desperation. 

Borrowers perceive the loans to be a reasonable short-term choice but express surprise and frustration at how long it takes to pay them back. Seventy-eight percent of borrowers rely on lenders for accurate information, but the stated price tag for an average $375, two-week loan bears little resemblance to the actual cost of more than $500 over the five months of debt that the average user experiences. Desperation also influences the choice of 37 percent of borrowers who say they have been in such a difficult financial situation that they would take a payday loan on any terms offered.

Read the entire report, How Borrowers Choose and Repay Payday Loans, at the Safe Small-Dollar Loans Research Project website, and check out other resources,  including an infographic explaining How Payday Loans Work.

 
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