Payday loans are unaffordable for borrowers, who choose them based on unrealistic expectations and desperation and ultimately turn to the same sources they might have used to meet their expenses to pay the loan off.
That's according to a new report, "How Borrowers Choose and Repay Payday Loans," released last week by The Pew Charitable Trusts' Small-Dollar Loans Project.
In a webinar, project director Nick Bourke explained that the typical borrower obtains a payday loan from a local store front, though these loans also can be obtained from banks and online. The borrower gives the lender access to his or her checking account and receives the money. The average loan is $375 with a $55 fee. The loan is due on the borrower's next pay day, but the average repayment period is actually five months.
Here are more of the report's findings:
- Fifty-eight percent of borrowers have trouble meeting their monthly expenses at least half the time. Borrowers are dealing with persistent cash shortfalls, not temporary emergencies.
- Borrowers perceive payday loans to be a reasonable short-term option, but express surprise and frustration at how long it takes to pay them back.
- Borrowers ultimately turn to the same options they could have used instead of the loan to pay off the loan. These options include getting help from friends or family, selling or pawning personal possessions or taking out another type of loan. "One in six borrowers has used an income tax refund to eliminate payday loan debt," the report stated."Borrower appreciation for urgently needed cash and friendly service conflicts with feelings of dismay about high costs and frustration with lengthy indebtedness," the report stated.
- A majority of borrowers say payday loans take advantage of them, but a majority also say the loans provide relief.
The study also found borrowers used payday loans primarily for six reasons:
- Desperation. More than one-third of borrowers say they've been in such a difficult situation they'd take a loan on any terms.
- Perception. Borrowers don't perceive payday loans as ongoing debt.
- Reliance. Borrowers rely on lenders for accurate information.
- Focus on the fee. Borrowers focus on their ability to pay the fee, rather than how the repayment will affect their budget.
- Trust. Some borrowers believe bank payday loans are safer or more regulated than other payday loans.
- Temptation. Some borrowers say payday loans are "too easy" to get because they're readily available to meet living expenses.
The Pew study also pointed out that it's nearly impossible to comparison shop for a payday loan because the cost and duration of the loan typically differ from the stated loan terms.
Follow me on Twitter: @marciegeff.