Banking Blog

Finance Blogs » Banking Blog » Payday loans ‘unaffordable’

Payday loans ‘unaffordable’

By Marcie Geffner ·
Friday, February 22, 2013
Posted: 3 pm ET

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.

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
February 04, 2014 at 6:02 pm

Desperation. More than one-third of borrowers say they've been in such a difficult situation they'd take a loan on any terms.

Kimberley Osteen
September 24, 2013 at 9:53 am

Heya i'm for the first time here. I found this board and I find It really useful & it helped me out a lot. I hope to give something back and aid others like you helped me.|

April 17, 2013 at 11:15 pm

If we are poor, does not mean we are stupid. We can read how high the interest is. To pay such high interest it might seem stupid to you, the one having 2 401ks and "invested" money, or just enough money to pay for your bills and few more people bills in your family.

Are you suggesting we should not borrow from them and let us be evicted, for example? Why living under a bridge is better?
And don't even try to suggest family and friends, because some have no family and the friends take these loans as well to get by.

It is actually six months to pay it off and that time gives a lot of people the time to find more work.
Why am I even trying? People with money can not understand any of this

johnny preserve
April 10, 2013 at 6:23 pm

Payday lending is legalized extortion. They are owned by most of the big banks which are borrowing money with zero interest. The Payday lending gives respectability to loan sharking. They should let the mob run them. I would feel more better about this shady industry.