Payday 2 Full Game
Juan Navarro
Pew's survey found 5.5 percent of adults nationwide have used a payday loan in the past five years, with three-quarters of borrowers using storefront lenders and almost one-quarter borrowing online. State regulatory data show that borrowers take out eight payday loans a year, spending about $520 on interest with an average loan size of $375. Overall, 12 million Americans used a storefront or online payday loan in 2010, the most recent year for which substantial data are available.
Most payday loan borrowers are white, female, and are 25 to 44 years old. However, after controlling for other characteristics, there are five groups that have higher odds of having used a payday loan: those without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced. It is notable that, while lower income is associated with a higher likelihood of payday loan usage, other factors can be more predictive of payday borrowing than income. For example, low-income homeowners are less prone to usage than higher-income renters: 8 percent of renters earning $40,000 to $100,000 have used payday loans, compared with 6 percent of homeowners earning $15,000 up to $40,000.
Most borrowers use payday loans to cover ordinary living expenses over the course of months, not unexpected emergencies over the course of weeks. The average borrower is indebted about five months of the year.
Payday loans are often characterized as short-term solutions for unexpected expenses, like a car repair or emergency medical need. However, an average borrower uses eight loans lasting 18 days each, and thus has a payday loan out for five months of the year. Moreover, survey respondents from across the demographic spectrum clearly indicate that they are using the loans to deal with regular, ongoing living expenses. The first time people took out a payday loan:
If faced with a cash shortfall and payday loans were unavailable, 81 percent of borrowers say they would cut back on expenses. Many also would delay paying some bills, rely on friends and family, or sell personal possessions.
When presented with a hypothetical situation in which payday loans were unavailable, storefront borrowers would utilize a variety of other options. Eighty-one percent of those who have used a storefront payday loan would cut back on expenses such as food and clothing. Majorities also would delay paying bills, borrow from family or friends, or sell or pawn possessions. The options selected the most often are those that do not involve a financial institution. Forty-four percent report they would take a loan from a bank or credit union, and even fewer would use a credit card (37 percent) or borrow from an employer (17 percent).
In states with the most stringent regulations, 2.9 percent of adults report payday loan usage in the past five years (including storefronts, online, or other sources). By comparison, overall payday loan usage is 6.3 percent in more moderately regulated states and 6.6 percent in states with the least regulation. Further, payday borrowing from online lenders and other sources varies only slightly among states that have payday lending stores and those that have none. In states where there are no stores, just five out of every 100 would-be borrowers choose to borrow payday loans online or from alternative sources such as employers or banks, while 95 choose not to use them.
Founded in 1948, The Pew Charitable Trusts uses data to make a difference. Pew addresses the challenges of a changing world by illuminating issues, creating common ground, and advancing ambitious projects that lead to tangible progress.
The term "payday" in payday loan refers to when a borrower writes a postdated check to the lender for the payday salary, but receives part of that payday sum in immediate cash from the lender.[1] However, in common parlance, the concept also applies regardless of whether repayment of loans is linked to a borrower's payday.[2][3][4] The loans are also sometimes referred to as "cash advances", though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Legislation regarding payday loans varies widely between different countries, and in federal systems, between different states or provinces.
To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, while others have very few restrictions on payday lenders.
A 2019 study found that payday loans in the United States "increase personal bankruptcy rates by a factor of two ... by worsening the cash flow position of the household."[7] A second 2019 study looking at the UK found that payday loans "cause persistent increases in defaults and cause consumers to exceed their bank overdraft limits."[8]
The basic loan process involves a lender providing a short-term unsecured loan to be repaid at the borrower's next payday. Typically, some verification of employment or income is involved (via pay stubs and bank statements), although according to one source, some payday lenders do not verify income or run credit checks.[9] Individual companies and franchises have their own underwriting criteria.
In the traditional retail model, borrowers visit a payday lending store and secure a small cash loan, with payment due in full at the borrower's next paycheck. The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower does not repay the loan in person, the lender may redeem the check. If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees or an increased interest rate (or both) as a result of the failure to pay.
In the more recent innovation of online payday loans, consumers complete the loan application online (or in some instances via fax, especially where documentation is required). The funds are then transferred by direct deposit to the borrower's account, and the loan repayment and/or the finance charge is electronically withdrawn on the borrower's next payday.[citation needed]
According to a study by The Pew Charitable Trusts, "Most payday loan borrowers [in the United States] are white, female, and are 25 to 44 years old. However, after controlling for other factors, there are five groups that have higher odds of having used a payday loan: those without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced." Most borrowers use payday loans to cover ordinary living expenses over the course of months, not unexpected emergencies over the course of weeks. The average borrower is indebted about five months of the year.[10]
This reinforces the findings of the U.S. Federal Deposit Insurance Corporation (FDIC) study from 2011 which found black and Hispanic families, recent immigrants, and single parents were more likely to use payday loans. In addition, their reasons for using these products were not as suggested by the payday industry for one time expenses, but to meet normal recurring obligations.[11]
Research for the Illinois Department of Financial and Professional Regulation found that a majority of Illinois payday loan borrowers earn $30,000 or less per year.[12] Texas' Office of the Consumer Credit Commissioner collected data on 2012 payday loan usage, and found that refinances accounted for $2.01 billion in loan volume, compared with $1.08 billion in initial loan volume. The report did not include information about annual indebtedness.[13] A letter to the editor from an industry expert argued that other studies have found that consumers fare better when payday loans are available to them.[14] Pew's reports have focused on how payday lending can be improved, but have not assessed whether consumers fare better with or without access to high-interest loans. Pew's demographic analysis was based on a random digit dialing survey of 33,576 people, including 1,855 payday loan borrowers.[15]
In the UK Sarah-Jayne Clifton of the Jubilee Debt Campaign said, "austerity, low wages, and insecure work are driving people to take on high cost debt from rip-off lenders just to put food on the table. We need the government to take urgent action, not only to rein in rip-off lenders, but also to tackle the cost of living crisis and cuts to social protection that are driving people towards the loan sharks in the first place."[17]
The likelihood that a family will use a payday loan increases if they are unbanked or underbanked, or lack access to a traditional deposit bank account. In an American context the families who will use a payday loan are disproportionately either of black or Hispanic descent, recent immigrants, and/or undereducated.[11] These individuals are least able to secure normal, lower interest rate forms of credit. Since payday lending operations charge higher interest rates than traditional banks (with notable exceptions, e.g., Barclays and Nationwide charge 35% and 39.99%,[18][19] respectively), they have the effect of depleting the assets of low-income communities.[20] The Insight Center, a consumer advocacy group, reported in 2013 that payday lending cost U.S communities $774 million a year.[21]
A report from the Federal Reserve Bank of New York concluded that, "We ... test whether payday lending fits our definition of predatory. We find that in states with higher payday loan limits, less educated households and households with uncertain income are less likely to be denied credit, but are not more likely to miss a debt payment. Absent higher delinquency, the extra credit from payday lenders does not fit our definition of predatory."[22] The caveat to this is that with a term of under 30 days there are no payments, and the lender is more than willing to roll the loan over at the end of the period upon payment of another fee. The report goes on to note that payday loans are extremely expensive, and borrowers who take a payday loan are at a disadvantage in comparison to the lender, a reversal of the normal consumer lending information asymmetry, where the lender must underwrite the loan to assess creditworthiness.
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