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Payday loans are short term, high interest loans designed to give borrowers a quick cash advance in a pinch. For many who live paycheck to paycheck, struggle with debt or have bad credit, payday loans provide immediate funds that they may not qualify for elsewhere.
However, these loans come with a lot of risks, and the payday loan industry can be predatory. These loans can have a huge impact on an individual’s finances, so it is important to understand how payday loans work, who is using them and how they are using them before deciding to take one out. Bankrate has compiled the following statistics about payday loans in the U.S.
Payday loan statistics
- Twelve million Americans use payday loans every year.
- The average payday loan is $375 on a two-week term with an average of $520 in fees.
- Texas has the highest APR on the average payday loan at 664 percent.
- Only 14% of payday loan borrowers can pay back their loans.
- States without regulations can have payday loan rates range from 391 to 521%.
- A slight majority of Americans, 55%, live in the 28 states where payday loan laws are permissive and less regulated.
- 58% of payday loan borrowers struggle to meet monthly expenses.
- 80% of payday loans are taken out within two weeks of paying off a previous payday loan.
- The majority of payday loan borrowers take out multiple loans.
Who uses payday loans?
Approximately 6 percent of Americans have used a payday loan in the last five years, but certain demographics are more likely to take out payday loans than others.
Younger, moderate to low income individuals tend to borrow at a greater rate, with 72 percent of borrowers having a household income of less than $40,000 a year and 52 percent falling in the 25 to 44 age category. However, several demographic factors impact someone’s likelihood of taking out a payday loan, including:
- Renters are 57% more likely to use payday loans than homeowners.
- Those with an annual household income less than $40,000 are 62% more likely to take out a payday loan.
- People who do not have a college degree are 82% more likely to take out a payday loan than people who do.
- African Americans are 105% to take out payday loans than people of other races/ethnicities.
Payday loan users by age
Here is a breakdown of payday loan demographics by age. People in their 20s are most likely to take out payday loans.
|Age||Percentage having used a payday loan|
Payday loan users by race and ethnicity
Here is a breakdown of payday loan demographics by race and ethnicity. African American people are more likely on average to take out payday loans than other races/ethnicities.
|Race/ethnicity||Percentage having used a payday loan|
|Other race or ethnicity||6%|
Payday loan users by home status
Here is a breakdown of payday loan demographics by home status. Renters are generally more likely to take out payday loans than homeowners.
|Home status||Percentage having used a payday loan|
Payday loan users by income
Here is a breakdown of payday loan demographics by income. Those who have an annual income less than $40,000 are much more likely to take out payday loans than those who make more than that.
|Level of income||Percentage having used a payday loan|
|$100k and higher||1%|
Payday loan users by education level
Here is a breakdown of payday loan demographics by education level. Those who have some or no college education are more likely to take out a payday loan than those who have a college degree.
|Level of education||Percentage having used a payday loan|
|Some high school||7%|
|High school diploma||6%|
|Master’s degree or higher||2%|
Payday loan users by marital status
Here is a breakdown of payday loan demographics by marital status. People who are separated or divorced are much more likely to take out payday loans than other demographics.
|Marital status||Percentage having used a payday loan|
|Living with partner||10%|
|Separated or divorced||13%|
Payday loan users by parental status
Here is a breakdown of payday loan demographics by parental status. Parents are more likely to take out payday loans than non-parents.
|Parental status||Percentage having used a payday loan|
Payday loans in America
The rates and terms of payday loans can vary significantly depending on the state. Some states do not even allow payday lenders, as these lenders can sometimes be debt traps. In states where payday loans are allowed, one of three levels of regulation may apply.
Permissive states allow high lender fees and APRs and generally have the fewest restrictions. Hybrid states tend to have more restrictions, either having rate caps, restrictions on loans per borrower, or allowing borrowers more pay periods to pay off the loan. Restrictive states either don’t allow payday loans, or have an APR rate cap of 36 percent, making it virtually impossible for payday lenders to set up shop in these states.
Payday loans are most common in urban areas and the midwest, with 7 percent of urban residents and 7 percent of residents in the midwest using them.
Why do people use payday loans?
Payday loans are intended for emergency or unexpected expenses, and it is generally advisable to avoid using them for anything else if possible. If someone is living paycheck to paycheck and falling behind on bills, a payday loan to cover groceries or rent may seem like a great idea. Unfortunately, the fees these loans incur are typically more than the loan itself, launching borrowers further into the cycle of debt.
However, the majority of payday loan borrowers, 69 percent, use these loans for regular expenses.
Payday loans are commonly used to pay for:
- Car payment
- Credit card payment
Payday loan alternatives
If you are in a tough financial situation and want to borrow money quickly, payday loans are not your only option. Payday loans tend to start a cycle of borrowing, and borrowers are likely to get in over their heads with extremely high fees. There are several alternatives to taking out a payday loan, including loans for lenders with bad credit, credit card cash advances and personal installment loans.
These options come with fewer fees and longer repayment terms. Credit card cash advances have high APRs similar to payday loans, but they allow the borrower a longer period to pay off the loan.
While interest rates on personal loans will be more for less qualified borrowers, personal loan rates are capped around 36 percent, significantly lower than payday loans. Additionally, personal loan lenders tend to charge fewer fees than payday lenders.
The bottom line
Payday loans can be extremely helpful for those who find themselves struggling with unexpected expenses or getting behind on everyday expenses. Payday lenders loan money to people who may not qualify anywhere else. However, taking out one payday loan typically leads to taking out more, leaving borrowers in a cycle of debt. Younger, lower income borrowers are more likely to take out these loans, and people of color also tend to take out payday loans at greater rates.
If you are considering a payday loan, make sure you know the payday lending rules in your state and that you are getting the lowest APR you can find in your area. Also beware of payday scams, as lack of regulation in some states can lead to lenders taking advantage of borrowers. However, if you can qualify, taking out a personal loan or credit card cash advance is a safer, less costly option.