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Subscribe to RSSA new report from the Pew Charitable Trusts calls into question the main marketing claims used to sell payday loans to 19 million Americans each year.
Payday loans are billed as a quick and easy solution to an unexpected financial emergency – an affordable, short-term loan that will help the borrower get to the next pay day. But they're not.
Most customers (58 percent) routinely have trouble meeting their monthly expenses. For them, the loan is a way to cope with a persistent lack of money. In fact, Pew found that seven out of 10 borrowers use these loans to pay regular living expenses, such as rent, utilities and credit card bills.
The ultimate cost and duration of these loans are “highly unpredictable and bear little resemblance to their two-week packaging,” Pew found. Only 14 percent of those who take out a payday or bank deposit advance loan can repay it in full.
“Our research shows payday loans are unaffordable,” said Nick Bourke, director of Pew's small-dollar loans research project. “The average borrower simply cannot afford to pay back an average payday loan which requires $430 on the next pay day.”
The Community Financial Services Association of America (CFSA), which represents payday lenders, called the Pew report incomplete and inaccurate.
“Pew unfairly paints the entire industry with a broad brush,” CFSA said in a statement. “In our current economy and constricted credit market, it is critical that consumers have the credit options they need to deal with their financial challenges.”
Why turn to payday loans?
For someone struggling to make ends meet, payday loans are mighty appealing. They’re easy to get. They’re confidential, so family members don’t need to know about them. Customers believe the advertising that describes them as a short-term fix for a temporary cash-flow problem.
Related: Are you earning minimum wage? We want to hear from you.
“That appeals to people because they don’t want more debt,” Bourke explained. “They don’t want another bill on the pile. They want an in-and-out solution, but for most payday loan borrowers it doesn’t work out that way. The reality is that the average payday loan borrower is in debt for 5 months of the year and pays $520 in finance charges.”
CFSA said its members provide an Extended Payment Plan, at no additional charge, if customers cannot repay their loan when due. Pew suggests the vast majority of borrowers don’t take advantage of this program where offered.
Why is this happening?
Simply put, customers have “unrealistic expectations” about the total cost of that loan. Pew found that they know the price they’ll pay upfront – typically $55 for a $375 loan – but they fail to consider the negative impact that loan will have on their budget in two weeks when it comes due. How are they going to come up with the cash – $400 or more – needed to pay off the loan in full?
“The loans are really difficult or impossible to repay unless the borrower gets some kind of a windfall or a bailout,” Bourke said.
The report quotes a former borrower from Manchester, New Hampshire who sums it up this way:
“Well, Friday came, you gave them your pay, what you owed them, which cleared off that loan, but now you have nothing, so you have to re-borrow to survive the week or two weeks.”
Payday loans are often marketed as a way to prevent checking account overdraft fees. Pew found they do not eliminate that risk. In fact, for about a quarter of the borrowers (27 percent) an overdraft occurred when the lender made a withdrawal from their account.
What’s it like to be a payday loan customer?
Borrowers expressed mixed feelings about payday lenders. They like getting on-the-spot credit, but they’re frustrated by how difficult it is to repay the loan.
A majority said they appreciate the service payday lenders provide – quick cash and friendly service. In fact, some said it’s too easy to get the money. A majority also said they felt taken advantage of by the high cost of the loan.
One person told Pew researchers it was a “sweet and sour” experience. It’s sweet when you get the money and sour when you have to pay it back.
Maybe that’s why borrowers overwhelmingly want to see changes in the way payday loans work and more government regulation.
A call for action
Millions of people use small-term loans when they’re short on cash. But as consumer advocates have long insisted and Pew researchers have now documented, all too often that quick loan doesn’t solve the problem and may make it worse.
“Policymakers need to pay attention to this research,” Bourke said, “because it really shows payday loans are not working as advertised.”
Payday lenders insist they provide “an important financial tool” for people who need money to pay for an unexpected expense or manage a shortfall between paychecks.
More Information:
- Read the full Pew report: "Payday Lending in America: How Borrowers Choose and Repay Payday Loans"
- ConsumerMan: Thinking of getting a payday loan online? Don't do it
Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.
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The mainstay banking industry has deemed itself to simply be "the guardian of corporate assets and provider of useless sedentary desk jobs" whilst shirking its TRUE functions involving actual activities involving banking/asset security.
Payday loans are simply the latest racket to spring from this failure of the mainstay banking industry to fulfill its actual services to the general public.
Actually, banks are a legitimate business, although a specialized one. They are profit motivated and do not exist to serve "the public." Would you lend a thousand dollars to a risky borrower? If I had oddles of money to lend out, I would have guidelines and require collateral. Never would I lend to anyone who had a near zero chance of repaying the loan.
On the other hand, payday lenders and car title lenders are loan sharks who prey on the poor.
thse loan sharks are worse than the MAFIA, they violate all THE USURY LAWS OF ALL STATES; BECAUSE THEY ARE CLASSIFIED AS PAWN, THEY ARE EXEMPT; close them down now; THE ANNUAL INTEREST IS OVER 350%, THIS IS UNREAL.
Hmmm... Most, if not all, payday lenders target active military, veterans, and other people who are beset with problems or circumstances beyond their control. They seek these short term loans, to try to get out of a problem, but the loan itself becomes an additional problem.
Every state should make legislation to limit the interest rate and "fees" that can be charged for any type of loan, not just the payday scammers.
All these lenders care about is harvesting dollars, and they do a good job at that.
If you take a pay day loan to pay for normal living expenses, you're already in deep trouble. Secondly, your credit rating clearly sucks due to your own mismanagement or you wouldn't be taking a loan from these vultures. And, "it's easy and family members do not need to know."...clearly an indication that you are a financial train wreck already. These loan sharks are for people who CONSISTENTLY have robbed banks, friends, family, or anyone else to the point that no one will give them credit. They deserve to pay the high interest as penalty for immoral lifestyle.
There is no secret that these people are vampires. But, people go there by the thousands. It's your own fault. No one is forcing you. Good people do not borrow from pay day loans.
@WhistleBerries It's illegal to loan to active members of the military. You're obviously confused. Also, how do these companies prey on the poor? Where do you think these poor people should go for money? Banks will not help them. Payday loan companies are the only ones willing to loan to them. Would you rather them to have no access to funds, at all?
Just like any other type of credit or loan you have to use it responsibly! To say it hurts people is like asking does credit cards hurt people??? Yes if they dont use them responsibly. When you get one of these loans you sign a consent saying that it is advised to only borrow what you need and can pay back. If I know I am going to bounce a check and possibly snowball my account and get charged fee after fee I would much rather borrow the money from a payday advance company and pay one interest fee. The fees ARE VERY resonable. Most only charge $15 for $100 and $30 for $300. I am glad the option is available and I USE IT RESPONSIBLY!!
Payday loans snowball - you take out one, and then another to repay the first, then another and antoher - and all of those places have tentacles into your bank account. The interest rates are like 600% or more. It's quick and you click right through it and then you have cash the next day. But it's awful...avoid payday lenders like the plague. I got to the point where I had 8 loans totalling over 5,000. I am repaying them now with the help of a credit agency who contacted all the lenders and arranged for me to pay them back on my terms. Had to close my long standing bank account since there was no way they would stop taking money out of my account. THEY ARE EVIL.... please everyone...AVOID LIKE THE PLAGUE!
Here in South Carolina, these 'kindly lenders' were recognized for what they are, unkindly lenders. With that in mind, no one can take out a second payday or a title loan until a first of either kind is paid. Good law indeed and one that should be instituted in all states.But that just ain't the case.
Of course, since I live near the Georgia line, many times people will just run across and take out a second and third, to pay off the first and second, ad nauseum. Of course, as soon as my state hears about it, and they do through tracking of SSN'since we pay ad valorum and income taxes, a freeze is put on that persons account(s) for the lenders. Only after paying off the loans can a person take out another. Lessons are learned quickly. And the person can still have some money to spend on bills, food and so on.
The sharks should be regulated. At least that way a person has a chance at having a payday every week, two weeks or month. This is especially true of military personnel, since I live near one of the largest military installations in the nation. It's those guys and gals that get burnt the worst.
That's why the US government has prohibited payday and title loans to military personnel and also restricted the amount of interest that can legally be charged to a member of the US military.
Of course, if we fix the massive income inequality that is destroying our nations economy, then there won't be anywhere near as many people for these pieces of scum to pray on.
These Payday loan institutions are required to report an APR and that's why you hear about interest rates in the hundreds. The fact is that an APR is meaningless for a 2 week loan. Imagine if conventional banks had to report their overdraft fees as an APR. Let's see, 1 penny of overdraft, a $35 fee over a day or 2 - we're talking big numbers.
Payday loans are not a great way to go, but they aren't as bad as people want you to believe.
Thank you Skane2600. I would only add that your "groovy friendly little Credit Union" does the same thing with over-drafts, except, they reshuffle your debits at the end of the month to maximize over drafts. Evil Bank Of America recently had to pay back customers for this same practice, yet Credit Unions can do it with impunity, because they are non-profit, and well, groovy, unlike the "evil" big banks. Credit Unions take advantage of the lack of regulations to pillage their "members. Like Apple, they pretend to be all groovy, while they rob you blind. Why don't you do a study on that, Pew??? The problem with Pew & CNNs Clark Howard, is that they study people who live paycheck to paycheck, while no one in their offices has any actual real life experience with that situation. At least with PayDay loans, you know what you're getting. You can't say the same of Credit Unions.
It seems that ripping off vulnerable people is legal.
Reads like you're blaming somebody else for your lack of responsibility.
It's all true, what you're saying, but the banks are equal culprits. I equate them with the taverns of an earlier day: Taverns used to be on almost every street corner, and they were happy to serve you, knew everything about you, and take your money, but when you were out of money, they'd just as soon that you moved on. Same with banks now. They're happy to take your money, they know everything about you, they're on every street corner --- but if you're out of money and you need help, they'd just as soon you moved on.... They don't get paid to care. They only lend money to people who HAVE money.
If you got the loan you owe the money back!! Just like any other business you are expected to pay back money YOU GOT. It is not free. Do you expect them to not collect the money. Since they are on every street corner and they are all in business there must be a need. No one made you go in and apply for the loan. This is a good example of not being responsible. If you borrow money from a family member can you just say sorry I can not pay you back. Get real!
Maybe that’s why borrowers overwhelmingly want to see changes in the way payday loans work and more government regulation.
If borrowers don't like pay day loans then they should use them as little as possible. Why involve the government more?
Simply put, customers have “unrealistic expectations” about the total cost of that loan. Pew found that they know the price they’ll pay upfront – typically $55 for a $375 loan – but they fail to consider the negative impact that loan will have on their budget in two weeks when it comes due. How are they going to come up with the cash – $400 or more – needed to pay off the loan in full?
Why is it the banks fault that the consumers don't think ahead and are stupid with their finances?
Because the government is the solution to stupidity and lack of personal responsibly in the new USA.
Agree! It is your choice to get one and how often you use it. If you can't pay it back don't do it.
It took a "study" to figure out that this was not a good deal for most who use them?????
Apparently it's going to take another study, because this one is wrong.
If payday loans are not a good deal, people won't use them and nobody will be in business giving out payday loans.
Exactly! No one holds a gun to their head and makes them go in and get a loan
A lot of people live paycheck to paycheck today. Most live on minimum or very modest wages. When something unexpected happens, where is someone going to get help? If family cannot help or you do not have something saved up in the bank, some people that are desperate for help will turn to a quick payday loan. It is quick and easy to get the money, but living paycheck to paycheck and trying to pay this loan back in two weeks becomes impossible. The person ends up with this debt and payday lenders are sharks. It is best to avoid banks too because of the many fees they tack on too, they are just another shark out for your money.
You need to save and live within your means. Even, if is a few dollars every week, it is your own money with no strings attached, like outrageous loan or bank fees. Use credit unions! They will help you get on the right track and help you manage your money more wisely. At least the credit unions do have some interest bearing accounts and have ways for people to use secured credit cards. The main point is you need to budget and live within your means because you actually need to depend on yourself throughout your life. You cannot depend on others to bail you out of financial trouble.
Rose colored glasses. Do you actually know any "poor" people? They live pay check to pay check and even get special assistance based on their circumstances. They can barely scrape by, mush less save money. Payday loans are easy for them to get, but hard to repay.
uh... wrong cincy/nky. Almost every sentence of your post is wrong. Credit Unions re-shuffle your debits right before payday to try & maximize over draft fees. It's illegal for Banks to do that, but credit unions aren't regulated so they do it with impunity. Of course, since we swallow all that "we're your friend, dear member" hooey, nobody ever does anything about it. The truth is that credit unions can (and do) tack on more outrageous fees because they are allowed to, unlike banks. Let me guess, your checking account has never tapped out, and I'll bet you typed your post on a device made by Apple???
This just in: Water is wet.
Simple and plain.
This just in: Usury is treason
Old news: you're stupid.
Anybody ever read the fine print of the "Western Sky" tv loan commericals? It stunned me once I could see what they were cooking up. From their website:
The interest rate on a typical loan of $2,600 is 135% with an APR of approximately 139%. Borrowers may prepay their loans at any time without penalty. There are no upfront fees. If you are approved and your loan is funded, we will collect a $75 loan origination fee from the proceeds of the loan.
135-139% and they can do it because they are an Indian tribe! Otherwise it would be illegal under state usury laws. They also take $75 from the loan as a fee that I am sure you are on the hook to pay, so what, its actually $150 origination fee???
As pointed out on another website: http://www.knoxviews.com/node/18857
You thought predatory payday lenders were bad. Check this out. An unsecured $500 loan costs you a $350 origination fee (added to the loan amount) and carries an APR of 342.86%, with 12 monthly payments of $150.72 totaling $1808.64.
A $10,000 loan is a somewhat better deal. It only requires a $75 origination fee and carries a much lower APR of only 89.68%. But, you will make 84 monthly payments of $743.49 totaling $62,453.16.
Now theres a payday loan to avoid!
Parasites.
Native Americans can do that stuff on the reservation. They're sovereign. So, yes, avoid that, as well as credit unions, and private student loans. They are loan sharks who have our goverment's blessings for one reason or another.
You are working for free, when you get tangled up with a payday loan you cannot pay back. Would you want to work for free now?
You can go back to the state legislator's who passed the bills over the years to make all this legal. The Predatory lender's lobbied them hard and anyone who could put pressure on them. Schools teach these young people how to add A + B = C but they do not prepare them for these evil people.
Why would this not be legal? They're offering a service. If you don't like it, don't use it. Nobody is forcing you to get a payday loan.
Imagine if you were banned from life because I didn't like what you posted.
When I figured out the Western Sky scam, I was amazed nobody has been arrested. But then, it's an indian reservation and they can get away with anything.
We no longer teach our children to COOK FOOD in our schools, and the generation of their parents were only taught about that new-fangled thing called a MICROWAVE!!!
What makes you think our nation's young adults could EVER understand THE TRICKS USED by ABUSERS/FRAUDSTERS short-term finance necessary to know when a short-term financier is operating ABOVE BOARD? These loan sharks (and the banksters) BLAME THE VICTIM OF THEIR TREACHERY continually... "You should have KNOWN how this system works, don't cry to me now about how you can't pay... you were told this going in!!!" No, no they weren't told about how IMPOSSIBLE it was DESIGNED to get in a short amount of time, no.
Geez, I sure miss "Common Sense". Do any of these people even think?
As someone who got caught up in the payday loan cycle, I am an intelligent person with a full time job. I had some family emergencies and a major medical contion that wiped out my savings account, . Mycredit cards were maxed out and they wouldn't increase my credit limit. My reason for my initial payday loan? I needed gas money to get to work and to buy a week's worth of groceries. It's all done online, and it's so easy...it snowballed. I know I got myself into this situation, but I have learned from it, and I would just like other people to benefit from my mistakes.
Hey everybody! Lets---BOYCOTT PAYDAY LOANS!
Problem solved.
Walmart now has check cashing, BECAUSE banks no longer offer sevices to these people, pay day loans are a symptom of the much larger problem
Having said all the article says, and all the comment says, is anyone forced into an involuntary payday loan? Is there any federal, state or local requirement that anyone must enter into commerce to use a payday loan (unlike the contravention of the constitutional commerce clause for Obamacare)? It may be wise not to do it, just as it may be wise not to smoke, skydive, or walk downtown late at night. These are adults making their own decisions, if you don't want to deal with the burdens of a payday loan, don't take one.
The payday loan is what used to be called loan-sharking, and was one of the favorite "businesses" of organized crime. The only difference between payday loans and the old-time loan sharks was that, when those old-timers said it would cost you an arm and a leg, they meant it literally, ... like, "pay up, or I'll break your leg."
Interesting that the word "customer" was used to refer to borrowers. The proper word is "victims." And to blame the borrower, saying he knew what he was getting into, is not necessarily correct. The terms may be spelled out, but what is the educational level and understanding of most of these borrowers? That is exactly why there should be legislative restriction on these loan sharks. They deliberately prey upon the poor and the marginally educated.
Most of the customers or victims in this case, don't have the common sense god gave chipmunks and couldn't understand the terms of the loans no matter how well explained. These need to be outlawed on a federal level. Title loans are in the same category as the pay day loans. A friend of mine took out a title loan and in no time he owed more that the vehicle was worth. They repoed the vehicle and destroyed his credit.
Payday loans, establishments like Amscot are legalized loan sharking, plain and simple.
I hope you didn't pay for this study stating the obvious.