A 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.