How Many People Use Payday Loans in the USA?
Payday loans are short-term, small-dollar loans that have been in existence for a long time in the USA. They help low-income earners resolve their emergency financial problems. This loan form appeals to most of the population because of its easy accessibility, quick turnaround, and availability to people who can’t access a traditional loan.
Many borrowers are repeaters who have defaulted on one or more loans. Short-term loans help them with payment of house rent, bills, car repairs, etc. Despite having a bad credit score, borrowers can still get payday loans via local stores and online loans. However, they are characterized by a higher annual percentage rate (APR) than what you’ll get if you opt for other personal loans or credit cards.
How Many People Use Payday Loans in the USA?
A study has shown that approximately 12 million Americans use payday loans every year. Americans in the low-income earning bracket look out for this high-interest loan which can get them into cyclical debt. Typically, payday loan borrowers spend an average of $520 in fees to borrow $375 repeatedly and are in debt for five months out of the year.
Most people who look out for payday loans have insufficient cash and constantly need more income. Reports show that about 69% of the people who take out payday loans use the money for recurring expenditures such as food, rent, and credit card bills. A measly 16% of payday loan borrowers use the money for urgent emergencies the primary purpose while 8% use it for other reasons.
Payday Loan Statistics
In 2017, Credit Summit reported that approximately 12 million Americans use payday loans per annum, and there were over 14,300 payday loan storefronts in the U.S.
While the average payday loan size is $375, research shows that most borrowers can afford no more than 5% while still covering basic expenses. Most borrowers for this type of loan earn in the range of $15,000 to $30,000 per year. Furthermore, the report revealed that around 58% of payday loan borrowers struggle to meet their monthly expenses, while only 14% of borrowers can afford loan repayment independently.
Experts recommend borrowing the money you can repay without getting into more debt. Although borrowing a loan might not land you in jail, it can, however, result in the following penalties:
- Late fees.
- Worsening your credit score.
- Affecting your chances of accessing future finance and loans.
- Borrowing may be more expensive in the future.
What Percentage of Payday Loans Are Repeaters?
Over 70% of payday loan borrowers have used this form of a short-term loan before. 7 out of 10 borrowers who take out loans use it for recurring expenses like rent and other regular bills
Payday loans are not meant to be used for such recurring, long-term use. Instead, these types of loans should only be used for one-offs, such as when your car breaks down and you need it fixed before you can get the money to do so from your next paycheck.
Before taking out any form of loan, it’s essential to check that the financial product you’re applying for is best suited to your financial situation and get the appropriate help when struggling with your finances long-term.
Why Are So Many Americans Using Payday Loans Incorrectly?
So many Americans use payday loans for various reasons. However, the major ones that are seen across the board are people borrowing for the wrong reasons, spending the money on unimportant things, lacking financial literacy, or taking precautions when taking loans.
Failure to Take Necessary Precautions
Due to the widespread usage of payday loans in the United States, it is apparent that borrowers are not taking the essential measures. Only consider this form of loan if you have a stable source of income that will allow you to repay it. More than half of payday loan borrowers, on the other hand, are unable to make their monthly obligations. A payday loan will not be of assistance to you if you are not financially solid. Only 14% of applicants can afford to repay their payday loans, according to statistics.
Not Borrowing for the Right Reasons
Payday loans are pricey and should only be used for one-time crises. Millions of Americans aren’t utilizing payday loans for what they’re meant to be used for: unexpected and temporary expenditures. Emergency automobile repairs and hospital or veterinary expenditures are some examples of situations where a payday loan can be considered. However, 70% of individuals who take out payday loans do so for routine recurrent needs like rent and utility bills, rather than for emergencies. Some borrowers utilize a payday loan to pay off other debt, which is something they should never do.
What is the Impact?
Payday loans have a high interest rate which directly impacts not only the borrowers but also the economy. When you use a payday loan over time, you could be putting yourself in a difficult situation. Because of the hefty costs, a payday loan may only solve financial problems temporarily, with money problems resurfacing later.
The most significant financial effect of taking out a payday loan might be falling into a debt cycle. People who have previously utilized payday loans account for three-quarters of all payday loans. Not only that, but 80% of payday loans taken out in the United States are taken out within two weeks after repaying a prior payday loan. In other words, most of the people who use payday loans are repeaters who have used them in the past.
Amanda is a senior financial copywriter at AdvanceSOS. She has more than six years of journalism experience, mostly in finance. She graduated with a Master’s degree in finance from the University of Oklahoma.