Thinking a payday loan is your best option for a fast financial fix? You might want to reconsider. According to Pew Charitable Trusts’ Safe Small Dollar Loans Research Project, the average consumer pays more than $500 in fees alone each year.
The project reports an estimated 12 million Americans turn to these payday loans every year and on average, they end up taking out eight loans within that twelve month period. The average loan is $375. Unfortunately, they’re repaying is a whopping 391% annual percentage rate. Most pay day lending companies advertise these various costs as fees, but too many times, it’s actually interest rates.
So why do so many turn to these payday loan companies versus, say, a cash advance on their credit cards? There are many theories, including the one that suggests a growing number of Americans no longer have access to traditional credit cards, courtesy of the tough economic times. There’s no credit check involved with a payday loan and the short turnaround time is attractive to those who are just trying to get to their next payday.
The problem, according to the project, is that more are turning to these loan products not as a quick fix to an emergency, but rather, a way of life. In fact, many are using these to cover their basic living expenses. This often results in that vicious cycle that keeps borrowers in the loop for renewing the interest ever week or every two weeks. On average, a single loan is often cycled for five months. The study reads,
Millions have turned to payday lenders when finances are tight, finding fast relief but struggling for months to repay loans.
Because lenders generally require little more than access to a consumer’s bank account – and then, only to verify it’s a valid and current account – the temptation for many borrowers is that they offset fast approaching cut off dates associated with their utilities, to make a credit card payment on the “last day to pay” or even buy groceries on the way home from the office. They’re simply offsetting a last minute crisis in many instances.
The study reveals:
After renewing a loan of $375 eight times, for example, the average borrower would pay back a grand total of $895 — including the $375 principal and the average $520 in fees or interest.
The Face of Payday Loans
The study also included statistics on who’s borrowing this money. Just more than half of the borrowers are white females, most often, they’re single parents too. African Americans make up a big percentage as well; in fact, they’re 105% more likely to secure these loans. Most all borrowers earn less than $40,000 annually and few of the borrowers do not have secondary educations.
Nearly 75% of borrowers actually go to the lender’s brick and mortar location – whether it’s a bank or a small company. That leaves 25% who go online in search of these fast loans. That convenience, however, costs more. For those who get in their cars and drive to a storefront, the average fee for a $375 loan is $55. For those who click their way to a payday loan company online, they pay on average $95 for the same loan.
Earlier this year, the CFPB was given full authority to regulate these lending companies. It’s currently examining the policies and practices of those companies and says it’s the agency’s “top priority”.
- FTC Warns of Prepaid Card Scams – May 23, 2013