What do you know about the average payday loan? The answer depends on who you ask!
Touted as a convenient, short-term option for borrowers with bad credit, it’s also an expensive product that may trap people in a never-ending cycle of debt.
Is one take right while the other wrong, or can both be true simultaneously?
The four facts below show these ideas may not be mutually exclusive. Keep scrolling to learn more about how payday loans work, who uses them, and why.
1. 12 Million Americans Use Them
Some 12 million Americans borrowed from a storefront or online payday lender in 2010. That’s according to “Payday Lending in America,” the most recent report completed by the Pew Charitable Trusts (PCT) on these short-term borrowing options.
While people of all walks of life may use these products, the PCT found most borrowers:
- Don’t have a college degree
- Are black
- Earn less than $40,000 a year
- Rent their home
- Are separated or divorced
Studies show individuals who fit one or more of these markers are more likely to live paycheck to paycheck. They also may struggle to get traditional financing from the bigger banks.
Enter the direct payday loan: it gives disenfranchised people a way to handle unexpected expenses when they have no other place to turn for help.
2. 69 Percent of Borrowers Use Them for Regular Expenses
Payday loans direct lenders recommend their products for unexpected emergencies, but most borrowers buck this advice. The same Pew Charitable Trusts report from above shows 69 percent of people use these short term loans for recurring expenses, covering such things as utilities, rent, groceries, or credit card payments.
3. The Average APR is in the Triple-Digits
The reason why you should only use these products in an emergency is because of their APR. Standing for Annual Percentage Rate, the APR of a financial product represents the true cost of borrowing. It includes the interest rate and any other fee or charge that may apply.
The average direct payday loan comes with an incredibly high APR compared to other borrowing options. Just how high they get depends on your state. In Tennessee, for example, the maximum loan amount is $500, which translates into an average APR amount of 469%.
4. 80 Percent of People Re-Borrow
Re-borrowing happens when you can’t afford to repay what you owe in the time allotted. To give you more time, some payday direct lenders let you extend your contract beyond its original terms. This process is also called rolling over, and it comes with penalties in the form of additional fees.
According to the Consumer Finance Protection Bureau, most borrowers wind up rolling over. Remember that most borrowers are living paycheck to paycheck. This financial situation combined with a high APR can make paying back what you owe a challenge, especially considering most terms last just two weeks.
In fact, it isn’t unusual for borrowers to re-borrow several times, falling into a cycle of debt. That’s why it’s always a good idea to think carefully before you rush into borrowing. Taking the time to consider your budget and repayment terms can help you avoid signing up for something you can’t afford.
Remember these facts if you ever face an unexpected expense of your own. If you need a little extra help, shop around for terms that you can manage — even if you’re living paycheck to paycheck.
