Maybe you have unexpected medical bills or car repairs, but there is just no room in the budget for those expenses. Ideally, these scenarios would call for a dip into the savings account, but in this economy, many Americans can only shake their heads and say, “Savings? What savings?”
When funds come up short, 12 million Americans have turned to payday loans, according to the Pew Charitable Trust. While payday loans may be an attractive option to for a short-term financial problem, the cycle of borrowing from yourself can be dangerously habit forming.
A recent Pew survey showed that 5.5% of adults nationwide have used a payday loan in the past five years. While 16% of consumers use payday loans for their intended purpose — a one-time stopgap for emergency costs — the survey showed that borrowers take out an average of eight payday loans per year. Loan amounts average $375, but borrowers end up paying $520 on interest. Once the cycle begins, the average borrower can become indebted five months out of the year.
Payday loans have become a crutch for millions of consumers, 69% of whom even use them for everyday living expenses such as utilities, credit card bills, rent and groceries.
The study indicates the following groups of people most commonly take out payday loans:
- White females between ages 25 and 44
- Those without a four-year college degree
- Home renters
- Those earning less than $40,000
- Those separated or divorced
If payday loans ceased to be an option, payday borrowers said they would employ a number of other methods to make ends meet including cutting back expenses on food and clothing (81%), taking a loan from a bank or credit union (44%), use a credit card (37%), or borrow from an employer (17%).
Payday loan regulations vary from state to state, and in states with the most strict regulation only 2.9% of adults used a payday loan in the last five years, compared to 6.3% in states with moderate regulation and 6.6% in lenient states.
According to Pew data, states with the highest rates of payday borrowing include Oklahoma (13%), Washington and Missouri (11%), Louisiana and Ohio (10%) Indiana (9%), Kansas and Kentucky (8%) Alabama, Colorado and Florida (7%).
Read the complete report, “Payday Lending in America: Who Borrows, Where They Borrow and Why” .