According to a study conducted by the Pew’s Safe Small Dollar Loans Research Project, there are nearly 6% of adults in the country that have used payday installment loans in the last five years. Mostly, these adults use payday installment loans to cover everyday expenses and not for emergencies. The report is based in part on a large survey that has found that 12 million Americans used short term loans, such as payday installment loans, in 2010.
This is why the payday installment loan industry has been getting more scrutiny from regulators, including the Consumer Financial Protection Bureau, because there have been an increasing number of online lenders that are offering these short-term loans in addition to the numerous storefront lenders. Payday installment loans have been gaining popularity among adults today due to the financial crisis they are facing and these loans are the fastest solution for cash problems.
Though payday borrowing is concentrated among younger, low-to-moderate income individuals, the recent study revealed that people from all ages irrespective of income use payday installment loans to meet daily cash needs. Among the borrowers who are most likely to use this type of financing are those who lack a four-year college degree, African-Americans, renters rather than homeowners, those earning less than $40,000 annually or those who are separated or have been divorced.
In fact, the study also found that almost three-fourths of payday installment loan borrowers go to storefront lenders and about a quarter are borrowing online. Payday installment loan borrowers take out at least 8 payday loans in a year and spend about $520 on interest for an average loan of $375. Most payday lenders charge about $15 for each $100 borrowed, repayable in two weeks with an equivalent of 391% annual percentage rate (APR). Most payday installment loans are secured by a postdated check or electronic debit authorization. Today, payday installment loan borrowers spend about $7.4 billion annually to repay storefront and online lenders.
This study by Pew’s Safe Small Dollar Loans Research Project Pew, is a first-ever survey done nationally through a telephone poll of payday installment loan recipients about their borrowing. The initial phase of the survey, that includes identifying payday installment loan borrowers, was conducted among 50,000 adults from August 2011 to December 2011, with a margin sampling error of less than 1%. In a twenty minute telephone survey conducted from December 2011 to March 2012, there are 451 storefront payday installment loan borrowers interviewed with a margin of error of +5% points.
Generally, payday installment loans are marketed as a two-week credit offer to help an adult in meeting unexpected expenses, such as a car repairs or even a medical emergency. However, most borrowers use these loans to cover ordinary living expenses which puts them in debt for an average of five months per year as the study revealed. For first time adults who use a payday installment loan, there are about 70% who use it to cover recurring bills, such as household utilities, credit card bills, rent or even food. Only 16% of borrowers have used these loans for unexpected expenses.
According to Nick Bourke, director of Pew’s small-dollar loan project, the findings of this study showed that there is a need to “…raise serious concerns” about payday lending, including “…whether a two-week product with an APR typically around 400% will be a viable solution for people dealing with a chronic cash shortage.”