In many cities, neon "payday loan" signs are ubiquitous in storefront windows and might go unnoticed by most passersby. But a new survey should make more people take notice of who's using those loans, how much they're borrowing, and the costs that can come with quick cash.
According to a study from the Safe Small-Dollar Loans Research Project at the Pew Charitable Trusts, roughly 5.5 percent of U.S. adults spend $7.4 billion annually at payday lenders. Those nearly 12 million annual borrowers tend to use the short-term loans in different ways than lenders market them.
"Although payday loans are marketed as short-term emergency loans, in reality, most borrowers used them for recurring living expenses and become indebted for an average of five months," says Nick Bourke, project director of Pew's Safe Small-Dollar Loans Research.
According to a phone survey conducted by Pew, 69 percent of borrowers say that they took out the loans to cover recurring expenses like monthly bills and rent. Only around one in six say they used the loans for unexpected expenses.
Payday loans are designed to provide borrowers with quick cash until their next paychecks. The typical term of a payday loan is two weeks, with borrowers paying a fee of around $15 to $20 per $100 borrowed.
According to the study, the average loan size is $375, with an average fee of $55. Borrowers on average take out eight loans annually, spending $520 on interest, with each loan lasting around 18 days.
A 15 percent fee for quick money may sound like a good deal, but the numbers can be misleading. The Consumer Financial Protection Bureau has calculated that for a two-week loan, $15-to-$20 fees per hundred dollars equate to an APR as high as 521 percent.
Who is paying those fees? On the whole, most of these borrowers are white women between the ages of 25 and 44, but the study digs into the demographic particulars of who is statistically most likely to use payday lenders.
Ten percent of renters have used a payday loan, compared to 4 percent of homeowners. Lower-income Americans are, perhaps unsurprisingly, more likely to take out the loans as well, with 11 percent of people making between $15,000 and $25,000 having used a payday loan, with the proportion decreasing further up the income ladder. Twelve percent of African-Americans have taken out payday loans, more than twice the figure for whites (4 percent), and twice the figure for Hispanics and other races or ethnicities (both at 6 percent).
The study also finds an increased likelihood for people who are parents, disabled, and separated or divorced.
The report comes shortly after the CFPB's January launched its supervision of "nonbanks," including payday lenders. However, the bureau has also made it clear that it would keep this avenue open for would-be borrowers.
"I want to be clear about one thing: We recognize the need for emergency credit. At the same time, it is important that these products actually help consumers, rather than harm them," CFPB Director Richard Cordray said in January.
The report suggests that regulating payday lenders leads to a decline in usage. Pew classifies 14 states, plus the District of Columbia, as having "restrictive" payday lending laws, either outlawing storefront payday lending or putting in low rate caps. According to the survey results, would-be borrowers in these states are generally not heading to online lenders in place of storefronts; 95 percent choose not to use payday loans at all.
But is that altogether good? The Federal Reserve Bank of New York studied the matter in 2007, looking at households in Georgia and North Carolina, which banned payday loans in 2004 and 2005, respectively. That study found that compared to more permissive states, Georgia and North Carolina households tended to have more bounced checks and to complain more to the FTC about lenders and debt collectors.
"This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending," wrote the report's authors.
The bottom line may be that, as states and the nation as a whole consider regulations, they may simply have to ask whether a questionable deal for borrowers is better than no deal at all.
Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at firstname.lastname@example.org.