What Percentage of People Don’t Repay Their Payday Loans?
Of the approximately 12 million Americans who use payday loans every year, only a meager 14% can repay them. Payday loans are often prevalent among low-income households and minority communities where financial literacy is lacking.
Aside from low-income, often less than $30,000, other risk factors contributing to a low percentage of people capable of repaying loans are age, marital status, ethnicity, financial confidence, and financial literacy. Millennials and Gen-X individuals are at higher risk of defaulting on loan repayment due to financial pressure and low financial education.
Why Are People Unable to Repay Payday Loans?
The average annual percentage interest rate (APR) for payday loans is around 400%. Most importantly, financial literacy and low income appear to be two of the prominent reasons people cannot repay payday loans. Payday loans are short-term loans that are advertised to cater to unexpected paychecks between payments.
However, 7 in 10 payday loan borrowers depend on them to pay off their recurrent bills like rents, electricity bills, etc. So, when they can’t repay the loan on time, this leaves them in the endless debt cycle. Here are some of the reasons why people are unable to repay loans.
- Low Household Income
- Bad Credit
- Paying Off Other Loans
- Marital Status
- Wrong Candidate for Loan Repayment
- Payday Loans are Unaffordable for Most Borrowers
- Employment status
- Sky-High APR
- Level of Financial Education
Low Household Income
Many people seeking a payday loan are in a low-income group with an annual salary of less than $30,000. As a result, even before needing to repay a loan, they struggle to meet their monthly costs.
Payday loan customers usually have bad credit, making it difficult to obtain loans from regular lenders. Their terrible credit means they won’t be able to stick to a repayment schedule.
Paying Off Other Loans
Many payday loan applicants are already in the process of repaying previous debts. In reality, 80% of payday loans are obtained within just two weeks of repaying a previous payday loan. Additionally, three-quarters of payday loans are taken out by someone who has previously taken out a payday loan.
Payday Loan Users Are in Debt
The average payday borrower is in debt for five months out of the year due to repeated borrowing or the fact that they are already in debt when they apply for a loan.
Payday Loan Users Lack Money
The average payday loan borrower is short on cash in general, with 58% of borrowers failing to fulfill their monthly obligations. A low-income, jobless, or deeply indebted individual is the usual profile.
Wrong Candidate for Loan Repayment
Because of their high-risk profile, many payday loan customers cannot obtain loans from traditional financial institutions and banks. As a result, one of the hazards that lenders face when offering payday loans is that borrowers will default on their payments.
Payday Loans are Unaffordable for Most Borrowers
Payday loans are expensive for many people by their very nature. The average payday loan has a payback amount of $430, which is around 36% of a typical borrower’s monthly income. In reality, according to data, the majority of borrowers can only manage to return 5% of their wages to fund their basic costs.
Payday loans have an average annual percentage interest rate (APR) of roughly 400%. A credit card’s “high” APR, on the other hand, is about 30%. Because of the high-risk nature of these loans, these lenders demand a far higher interest rate than typical lenders. Lenders are not required to charge at a competitive rate; instead, they can set the maximum rate allowed by state law.
How Many People Are Relying on Payday Loans?
It is estimated that about 12 million Americans take out a loan every year. A majority at least 75% of these payday loan users are repeat borrowers. They rely on payday loans to pay back other loans. Aside from repaying other loans, people also rely on advancement loans to cover everyday living expenses rather than solve significant financial challenges.
About 4 out of 5 of these payday loans are taken out within just two weeks of paying off a previous payday loan. In addition, three-quarters of payday loans are requested by someone who has already used them.
Why Do So Many People Rely on Payday Loans?
Short-term loans are easily accessible to people with poor or bad credit scores, low-income earners, and those who do not have access to a traditional financial institution. In addition, people who default on one form of credit or another seek payday loans to sort out their urgent financial needs.
The loss of job, unemployment, a divorce, and single parenthood predispose people to seek high-interest, payday loans. But, on the contrary, individuals from families of generational wealth and high parental income tend to be less likely to rely on payday lending.
Who is Using Payday Loans?
People of various socioeconomic, financial, and demographic characteristics access payday loan facilities. For example, young adults are more likely to use payday loans than senior citizens, while parents are more likely to use them compared to those without children.
Statistics show that people who receive financial education are about 19% more likely to take out a payday loan than those who do not. In addition, those with financial education and low income tend to use a payday loan.
Moreover, minority communities tend to take out loans more than those well-represented and with better living standards. For example, renters are more than two times more likely to seek loans than homeowners.
What Happens When Borrowers Cannot Repay?
Lenders charge an extra fee when borrowers cannot repay the loan in the agreed period. This additional fee is added as part of re-borrowing or rolling over the debt.
When borrowers default on their repayment, they borrow more, which puts them with more financial burden and in a cyclic debt profile. Therefore, the earlier a loan is repaid, the better for the borrower. Planning, increasing household incomes, saving, and budgeting are simple ways to repay a loan.
Jake Walker knows that good information is critical for financial success. It is his fifth year of working in the finance sector and his 3rd year working as Head of Content with AdvanceSOS. Jake’s contributions are highly valued when it comes to assessing cash flow and optimizing fiscal resources. With his certification and qualification in the field, Jake takes pride in helping as many as possible achieve their true financial potential.