A new report from The Pew Charitable Trusts, Payday Lending in America: How Borrowers Choose and Repay Payday Loans, sheds light on the decision 12 million Americans make every year to use a payday loan.
Pew's survey results reveal 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, the typical duration, when the average borrower can only afford $50. When borrowers have trouble paying off the loan, they return to the very same choices they initially tried to avoid.
“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.”
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.
Additional findings from the national telephone survey of payday loan borrowers and 10 focus groups held across the country reveal why people turn to these loans and how they are deeply torn about the experience.
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 (margin of error +/- 0.2%). The information about borrowers' experiences with payday loans is based on 703 interviews representative of payday loan borrowers (margin of error +/- 4.2%). Borrower quotations in this report come from a series of 10 focus groups.
Pew's safe small-dollar loans research project focuses on small-dollar credit products such as payday and automobile title loans, as well as emerging alternatives. The project works to find safe and transparent solutions to meet consumers' immediate financial needs. www.pewtrusts.org/small-loans
The Pew Charitable Trusts is driven by the power of knowledge to solve today's most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public, and stimulate civic life.