The Grim Picture of Short Term Lending
Payday Loan Industry In Numbers
- Most lenders offer payday loans of between $500 and $1,000 based on borrowers’ pay amount.
- Repayment period is usually 2-weeks.
- Payday loan industry annual income is roughly $6 billion, mostly made up of fees charged on the loans.
- The fees are earned on loans worth about $35 billion every year.
- 80% of payday loans are taken out within two weeks of most people paying their payday loans.
Payday Loan Lender and Borrower Key Metrics
- There are roughly 23,000 payday loan lenders in the U.S.
- Most payday loan lenders make money 90% of the time by simply renewing the loans to defaulters and imposing high-interest rates.
- Average payday loan borrowers earn an average of about $30,000 a year.
- Most payday loan borrowers are usually in debt for five months each year due to the high interest rates levied on the loans.
- 58% of payday loan borrowers in the U.S. struggle to meet their monthly obligations.
- Almost 75% of the money borrowed goes to people who take 10 or more payday loans every year.
- More than 15% of all new payday loans are from rollover of existing loans as most borrowers struggle to clear the amount borrowed on time.
Payday Loan Use Cases in the US
- Nearly 12 million Americans use payday loans to cover cash flow issues from one pay period to another.
- 70% of payday loan borrowers use the amount to pay for living expenses, including car payments and other debt obligations.
- Just 16% of payday loan borrowers in the U.S. end up using the money lent for unexpected expenses such as car repair or medical bills.
Key Payday Loans Statistics by State
- A majority of states in the US have offered friendly environment for payday loans proliferation
- Some of the states where payday loans remain banned include Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Vermont, and West Virginia. Payday loans are also prohibited in the District of Columbia.
- Concerned by the high fees, some states have already imposed bans on the high-interest rates loans. Some states have resorted to interest rate caps to prevent lenders from taking advantage of people’s financial emergencies.
- Per state use of payday loans varies significantly. Some states see a 1% use case while others see a use case upwards of 14% among state residents. The disparity stems from the different laws and regulations in each state.
- In Louisiana, payday loans have a 10% use rate among residents with a $350 loan limit.
- In Missouri, the use rate is 11%, with a $500 loan limit.
- The payday loan use rate stands at 11% in Washington, with a $700 loan limit.
- Its uptake also tends to be much higher in the Midwestern USA and urban areas.
- 7% of people living in the Midwest US are likely to take such loans, with the south and west following close second at 6%.
- 7% of people living in urban settings are likely to take payday loans. Uptake is much lower at 4% and 3% in small towns and suburban areas.
Payday Loan Default Rates
- Despite payday loans coming with some of the highest interest rates, the default rate is one of the lowest, at just 6%.
- Only 6% of lenders are likely to write off an unpaid loan. That is because most lenders rollover the defaulted loan. A rollover accords the lenders the opportunity to impose a higher interest rate to generate optimum returns over a prolonged period.
- Payday loan rollover often results in interest rates skyrocketing to highs of 400% or even 600%.
Payday Loans Alarming Trends
- The average payday loan of about $375 comes with a $520 fee which is much higher than the amount borrowed. The high fees stem from a lender charging upwards of $55 every two weeks.
- A high annual percentage rate of more than 660% on a $300 payday loan affirms why payday loans are some of the most expensive loans.
- Some of the states with high APR on payday loans include Texas, whose rates can hit highs of 664%, with Utah Idaho and Nevada recording highs of 652%.
- The high-interest rates levied by lenders might also explain why just 14% to 20% of payday loan borrowers can repay their loans on time. The remaining 80% are usually forced to extend the repayment period, resulting in lenders hiking the interest rate once a rollover kicks in.
- Borrowers must pay at least $430 from the next paycheck, which is a high figure considering that it equates to about 36% of most borrowers’ gross pay. The high fees might explain why most people are usually entangled in the payday loan repayment cycle.
- 75% of the people who take a payday loan are generally at risk of taking another one once given a chance to do so.
- People earning less than $40,000 a year are 60% likely to pursue payday loans to address recurring expenditures that their paychecks cannot meet.
- People in a more precarious financial position are also likely to take up payday loans despite the risk of high-interest rates.
Payday Loan Demographics
- Payday loan uptake is highest in people between 25 and 29 years.
- People between 18 and 24 years are less likely to resort to such financing options as many are dependent on parents or other family members.
- Payday loan uptake tends to decline as people reach the age of 50 years and above.
- People above 70 years are less likely to resort to such financing options as most have settled down and don’t have many financial obligations.
- Payday loan usage is higher at 57% in people who rent houses than homeowners. Its use is also higher among those people with just a college education or less than a four-year degree.
- Statistics have also shown that divorced people are twice as likely to take payday loans compared to other marital statuses.
Amid the growing popularity of payday loans, it’s becoming increasingly clear they are not the right option for anyone looking to secure their future financially. As many as 81% of payday loan users agree on the need to cut back on expenses, as a way of staying clear of such high-interest rate loans.
Concerned by the amount of interest rates that some lenders impose, many Americans are already pushing for greater regulation of the sector. For this reason, the CFPB has begun making proposals as it looks to transform the payday loan sector.
Some of the proposals include limiting the amount that a payday loan can take up in paycheck. In addition, there is a push to increase the time that borrowers are given to repay any amount owed.