What Does The Typical Payday Borrower Look Like In The United States?
Payday loans are highly specific financial products. Those people most underserved by banks and traditional lending look to payday loans as small, short-term loans.
Pew Safe Small-Dollar Loans Research Project focuses on small-dollar credit products. Small-dollar credit products include payday loans. It recently conducted a nationwide survey to profile typical US payday borrowers. Here were their key findings:
- Most payday loan borrowers are white, female, and are 25 to 44 years old.
- Five groups have higher odds of having used a payday loan:
- Those without a four-year college degree;
- Home renters;
- African Americans;
- Those whose annual earnings are below $40,000; and
- Those who are separated or divorced.
Most payday loan borrowers are low-income Americans. During times of dire need, they have little to no access to other forms of credit. They lack good credit rating, collateral, and stable income to qualify for loans.
Low-income earners live paycheck to paycheck. Seldom do they have the extra funds to put into a bank account to build a good credit history. Without good credit, low-income earners do not have many borrowing options. Payday loans are the exception.
Other forms of loans are bigger loans ranging from $2,000 to as much as $100,000. Most lower-income earners cannot afford to get big long-term loans. They only need small loans for essential expenses or short-term cash emergencies. It makes little sense for a low-income earner to borrow a $20,000 personal loan to make it to the next paycheck. It is difficult to pay back in value, time, and net interest.
Thus, most low-income earners find payday loans more suited to their cash needs.
25-29 Years Old
Young Americans between the age of 25-29 years struggle with student loan debts. It is a financial problem unique to Millennials and GenXers. College education has become expensive in the US. Many students turn to student loans for survival – this takes a toll later when they become employed.
More than 75% of college students graduate with an average of $39,351 in student loan debt. Student loan debts are dragging young Americans down and can prevent them from becoming independent.
Even with many jobs and side hustles, a $40,000 debt is a long-term dead weight. The repayment plan can last for as long as 20 years, and the interest can soar to more than half the original loan. Most 25-29-year-old Americans have only begun earning; yet, they already carry such financial responsibility.
With the recent economic downturn, these young adults are having difficulty coping. Without emergency funds and good credit history, payday loans are one of the few emergency options they have. Payday loans keep them above water when their paycheck fails to cover expenses.
Frequent borrowers usually do not have alternatives to payday loans. They keep returning to payday loans for various reasons. The thing about some borrowers is they borrow for the wrong reasons. Wrong reasons include debt consolidation and making luxurious purchases.
Around a quarter of payday loans roll over at least eight times. The more payday loans roll over, the more difficult paying them back becomes. Frequent loan rolling over can lead to drowning in debt. Some borrowers fail to recognize this. They continue with irresponsible loan behavior and end up in all sorts of bad situations.
Payday Loans as Last Resort
Payday loans are almost indiscriminate. Payday loan lenders only do soft checks and almost approve every application. Payday loans are safety nets for everyone who cannot get a loan anywhere else. Thus, most payday loan borrowers have low income and bad credit history.
All financial decisions are not light decisions. Payday loans, as easy to get as they are, are not cost-free or risk-free. Reserve it as the last option. Borrowing in the first place should not be anyone’s first option for everything. Credit is a responsibility, and repaying is a personal duty.
Payday loans may not take much to borrow, but delinquent paying definitely will. Risks include high interests, penalties, worsening credit history, wage garnishment, and lawsuits.
Before borrowing, make sure you can follow through with your commitments. You should not only have a plan on how to spend the money you will get. You also need a plan on how to repay your lender. The truth is, the danger of payday loans is in the misuse of borrowers, not the loan.
Payday Loan Misjudgment
The harsh judgment is that payday loans are bad because they target the poor. Though not untrue, it is not a bad thing, either. Payday lending does target the poor, the most underserved by traditional lending. Payday loans provide credit access to the most high-risk borrowers. These are the very same people that banks turn away from without a second glance.
Without payday loans, many individuals would have no access to credit at all. The most vulnerable will be even more vulnerable. Additionally, the demand will not disappear. These people will still need access to credit in times of dire need.
The current alternatives include dangerous street loans from unregistered lenders with no storefronts. Without a more sustainable financial system, payday loans are safer than their alternatives. Storefront payday lenders have registrations, licenses, and functions under government regulation. Borrowers are more protected and secured from fraud.
Payday loans are not risk-free, but they are not dangerous in themselves. When used responsibly, payday loans can be helpful, even life-saving, in times of cash emergencies. It is up to borrowers to use them with care. That doesn’t mean that because payday loans are easy to get, borrowers should abuse their use.
Amanda is a senior writer at AdvanceSOS. She has more than six years of journalism experience, mostly in the finance sector. She graduated with a Bachelor’s Degree from Drew University.