Payday Loans: From Research to Reform
An estimated 12 million Americans take out payday loans each year spending $7.4 billion annually.
The Pew Charitable Trusts’ newest report and the Pew's first-ever nationally representative telephone survey, Payday Lending in America: Who Borrows, Where They Borrow, and Why, examines payday lending and reveals findings that contradict general perceptions about borrowers and their reasons for borrowing.
Payday loans, which are marketed as two-week credit products for temporary needs, are in fact predatory short-term, high-interest loans, with borrowers paying an average of $520 in interest for eight $375 loans or extensions. According to the report, average consumers are in debt for five months and are using the funds for ongoing, ordinary expenses—not for unexpected emergencies.
The report's findings challenge much of the conventional wisdom on short-term loans, such as the assumption that people have no other options. In fact, a majority of borrowers report having several alternatives they would use if payday loans were not available.
Other findings that contradict general perceptions include:
Who: Most borrowers are employed, white, female, and 25 to 44 years old. More than half, or 55%, of payday loan borrowers are white, and 52% are female. However, consumers who disproportionately use these products are those who lack a four-year college degree, are home renters, African-American, earn less than $40,000 per year, or are separated or divorced. African-Americans are 105% more likely than other races or ethnic groups to take out a payday loan, for example.
Why: Consumers use payday loans to cover everyday living expenses—not emergencies. Pew found that 69 percent of first-time borrowers needed funds for recurring expenses, such as utilities, credit card bills, or rent or mortgage payments. Only 16 percent sought money for unexpected expenses, such as a medical emergency. If payday loans were not available to them, 81 percent of borrowers reported they would cut back on other expenses instead.
Where: Of the 5.5 percent of adults nationwide who used a payday loan in the past five years, three-quarters went to storefront lenders—which can include big banks or smaller companies—and nearly one-quarter went online. Online loans are typically more expensive—coming with average fees of $95 per $375 loan, compared to $55 fees for storefront loans, the study found. Interestingly, in states with regulations that have eliminated storefront payday lenders, Pew found much lower payday loan usage overall; people did not borrow from online lenders instead. Ninety-five percent of would-be borrowers elected not to use payday loans at all, and only five percent went online or elsewhere in these states.
The report comes at the same time that the Consumer Financial Protection Bureau (CFPB) has begun exercising the authority given to it to regulate payday lenders at the federal level. The CFPB recently requested comments on a proposed rule to establish procedures for determining whether a nonbank, such as a payday lender, is engaging in activities that pose risks to consumers and, therefore, should be supervised. Additionally, the CFPB has gathered information and is conducting on-site audits about the business practices of these lenders using Short-Term, Small-Dollar Lending Procedures—a field guide CFPB examiners will use to make sure payday lenders—banks and nonbanks—are following federal consumer financial laws that the CFPB published in January. The CFPB has indicated that it is also examining banks offering payday-like loans, which consumer groups say can trap borrowers in similar cycles of debt.
U.S. regulators and Congress are also joining the fray by scrutinizing partnerships between payday lenders and Native American tribes in an attempt to evade the increasing number of restrictions being placed on payday lenders through state legislation since tribal enterprises are not subject to states or federal law. Congress is also considering legislation to regulate payday lending in general and online payday lending in particular. The Protecting Consumers from Unreasonable Credit Rates Act, S. 3452, introduced in the Senate by Senator Dick Durbin (D-IL) would create a national interest rate cap of 36 percent. The bill, which would affect payday and car title loans, along with various other types of credit, is a response to the persistent triple digit interest rates common among payday loans and other high-cost loan products. The Stopping Abuse and Fraud in Electronic (SAFE) Lending Act, S. 3426, which was introduced at the same time, would allow states to petition the CFPB to stop lending by tribes in states where payday loans are illegal. That way, states would not directly litigate against tribes, thus preserving sovereign immunity.
As the first in a series of reports that will provide research for policy makers as they consider the best ways to ensure a safe and transparent marketplace for small-dollar loans, PEW’s report confirms previous reports on the predatory nature of payday lending and come at just the right time to inform policy decisions.
