PAYDAY LOANS AND THEIR $7.4 BILLION ANNUAL BILL

August 03, 2012Katy WelterChicago Appleseed Fund for Justice

Each year, 12 million borrowers spend approximately $7.4 billion on payday loans. Who and where are these individuals and why do they borrow from payday lenders? The Pew Charitable Trust aims to answer these and other questions about payday lending in America through a series of reports.

The first report, "Who Borrows, Where they Borrow, and Why" (pdf) of the Payday Lending in America series was released last month. It offers a number of key insights:

  • About 17 million adults (or 5.5% of adults in America) have used a payday loan in the past five years.
  • Borrowers pay an average of $520 in interest to borrow $375.
  • Five financially vulnerable groups are most likely to use payday loans: those without a four-year college degree; home renters; African Americans; those that they would borrow from a traditional lender, and would instead opt to delay major expenses such as earning below $40,000 annually; and those who are separated or divorced.
  • High risk borrowing falls as much as half in states that have enacted strong consumer loan protections. 

The report also provides a snapshot of payday lending usage and regulation in each state, labeling payday lending laws as "permissive," "hybrid" or "restrictive." Pew characterizes Illinois' payday lending laws as "permissive" because, under some circumstances, Illinois allows single-repayment loans with an APR of 391% or higher. Under a single-repayment structure--as opposed to regular, amortized repayment--borrowers must make one large "balloon" payment. This structure makes borrowers less likely to be able to pay off the loan and more likely to be ensnared in a debt cycle.

Interestingly, Pew's interactive tool indicates that several states' laws are so restrictive that payday lenders have responded by closing all of their storefronts. Yet, there is tremendous demand for short-term, convenient access to small dollar loans. With that concern in mind, Pew asked borrowers what they would do without access to payday loans. In response, a large majority (80%) of borrowers said they would cut back on basic expenses, such as food and clothing. A minority stated they would approach traditional lenders, choosing instead to delay major commitments such rent, or borrow from loved ones.

IABG recognizes the need for safe, affordable small dollar loans obtainable on short notice. That's why we are currently developing a toolkit--soon to be available on this website--for community banks and credit unions interested in entering this growing market.

Katy Welter is a Law & Policy Analyst with Chicago Appleseed Fund for Justice and a researcher on IABG's Alternative Small Dollar Loan project. Learn more about the Chicago Appleseed Fund for Justice, an IABG Partner.

Payday Loans