Cash-strapped consumers that turn to payday loans to solve their short-term financial needs frequently have little realistic chance of paying them off on time, according to a new study.
A report issued Wednesday by the nonprofit Pew Charitable Trusts found that just 14 percent of borrowers nationwide can afford to pay off the average payday loan when it comes due. Consequently, most borrowers end up renewing their loans or, alternatively, paying them off and then quickly taking out a new one.
Payday loans are unaffordable, Nick Bourke, director of Pews Safe Small-Dollar Loans Research Project, told reporters on a conference call Wednesday. Renewing a payday loan is affordable and paying it back is not.
Payday loans are in effect cash advances for workers in between paychecks. North Carolina outlawed payday loans more than a decade ago, but the industry hopes to make a comeback.
A bill to revive payday lending in the state, recently introduced in the Senate, has attracted a powerful co-sponsor, Senate Rules Committee chairman Tom Apodaca, and is being pushed by heavyweight lobbyists representing the industry.
The primary sponsor of the bill, Sen. Jerry Tillman, a Republican from Archdale, argues that the bill has safeguards that would eliminate abusive loans. But advocacy groups and Attorney General Roy Cooper say it would enable lenders to lure cash-poor working people into a cycle of debt in which many borrowers pay more in interest than they ever borrowed.
The new Pew report surveyed 703 borrowers of payday loans nationwide, supplemented by eight focus group sessions conducted with borrowers in four cities. Its a follow-up to a report the group issued last year that found, among other things, that 69 percent of first-time borrowers use payday loans for everyday bills rather than unexpected expenses.
Bourke said that the average loan is for $375 and carries an average fee of $55. So paying back the average loan in full would require $430 when the borrower receives their next paycheck, typically two weeks later.
But the average borrower can afford to pay just $50 in two weeks, which is barely enough to pay the fee, the survey found. And only 14 percent can afford to pay more than $400.
Nonetheless, consumers are driven to payday loans by unrealistic expectations and by desperation, the report states.
A payday industry trade group, the Community Financial Services Association of America, issued a statement that dismissed the report.
Pews research in this area continues to lack vital context about the broader marketplace and the lack of available credit options, the importance of consumer choice, and why 19 million Americans use payday loans each year, the association said.
Short-term credit products are an important financial tool for individuals who need funds to pay for an unexpected expense or manage a shortfall between paychecks, the association continued.
Borrowers who choose to use payday loans may do so to avoid bouncing checks, paying overdraft protection fees, incurring late payment penalties, or turning to other credit options that can actually be more expensive than CFSA-member loans. The typical fee charged by CFSA members is $15 per $100 borrowed.
They make such broad conclusions based on a relatively small sample size, said Jamie Fulmer, a spokesman for Advance America, one of the nations largest payday lenders. Overwhelmingly, the customers who use our product, they use the product responsibly and to their satisfaction.
Other findings in the Pew report:
• Borrowers favor more regulation of payday loans by a nearly 3-1 margin.
• Four in five borrowers take out three or more payday loans per year. The average payday borrower owes money on a payday loan for five months during the year.
The industry is counting on that, Bourke said.
Without frequent and repeat usage, payday lenders cannot be profitable, he said.
• Many borrowers who choose a payday loan over alternatives such as selling or pawning their possessions or borrowing money from family members or friends end up ultimately taking such steps anyway in order to pay off the loans. Forty-one percent of payday loan borrowers have tapped such alternative sources of cash, including tax refunds, to pay off their loan at least once.
• Although the industry promotes payday loans as a way of avoiding an overdraft on their checking accounts, 27 percent of borrowers reported that their checking account was overdrawn because a payday lender made a withdrawal from their account.
• Borrowers are conflicted about payday loans. A majority say the loans take advantage of them, yet a majority also say they would use payday loans again.