The payday loan industry is big business. Just how big? The Pew Charitable Trusts' Safe Small-Dollar Loans Research Project reports an estimated 12 million U.S. consumers take out payday loans each year, paying an average $520 in fees for a $375 loan.
The survey found 5.5 percent of the adult population have used a payday loan in the past five years, with three-quarters of borrowers using storefront lenders and almost one-quarter borrowing online. Data from various state regulators show that borrowers take out eight payday loans a year.
Payday lenders don't assess an interest rate for the loan, but rather a fee. The survey found $15 per $100 borrowed in typical. But because the loans are only for two week periods, that translates into a triple-digit interest rate.Â
Payday loan customers generally reflect U.S. demographics. Most are white, female, and are 25 to 44 years old. But behind those numbers another pattern emerges.
Who uses payday loans?
After controlling for other characteristics, the survey shows there are five groups that have higher odds of having used a payday loan:
People without a four-year college degree
People who rent their home
People earning less than $40,000 a year
People who are separated or divorced
"It is notable that, while lower income is associated with a higher likelihood of payday loan usage, other factors can be more predictive of payday borrowing than income," the authors of the report write. "For example, low-income homeowners are less prone to usage than higher-income renters: eight percent of renters earning $40,000 to $100,000 have used payday loans, compared with six percent of homeowners earning $15,000 up to $40,000."
How consumers use payday loans
The survey also looked at how consumers use payday loans. The industry markets these small, short-term loans as an emergency advance, to help the consumer deal with an unexpected expense like car repair.
But according to the Pew survey, most borrowers use payday loans to cover ordinary living expenses over the course of several months. The average borrower, the survey finds, is in debt about five months of the year.
The survey found that 69 percent of borrowers used the money to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments or food. Sixteen percent said the money went to cover an unexpected expense, such as a car repair or emergency medical expense.
Critics of the industry says this disconnect between the perception and reality of payday loans makes them dangerous to consumers, who end up in a cycle of loans, using one to pay off the next. In comments filed in April with the Consumer Financial Protection Bureau, the Center for Responsible Lending said regulators need to tighten rules that govern payday loans.
"The product's structure -- lack of underwriting, high fees, short-term due date, single balloon payment, and having access to a borrower's checking account as collateral -- results in most borrowers having no choice but to take out more loans to pay off the initial loan," the group said.
The industry counters that it is providing a needed service for a large portion of the population that has no other access to credit in the event of an emergency. Take away payday loans, the industry says, and you get more consumer distress.
The Pew survey specifically asked consumers who have used payday loans what they would do if payday loans didn't exist. Eighty-one percent said they would cut back on expenses. Other responses included delay paying some bills, rely on friends and family or sell personal possessions.