Sara Routhier, Managing Editor of Features and Outreach, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming worl...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 20, 2012

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Cash loans, also called payday loans, were once not so commonplace in our society—but then again foreclosures, vehicle repossession, unemployment, and public service announcements on child hunger in America weren’t either.

Nearly everyone has been affected by the recession. For some people, the recession—or “depression” in the eyes of many—led to the end of home ownership, a lost college education, or the termination of a career. Nearly everyone has tightened their belts since the recession’s full onset.

As the recession loomed over the country, demand for payday loans soared as more Americans lived hand-to-mouth. With that transition demand for payday loans also rose.

Low-income ethnic minorities are typically viewed as the average borrowers of cash loans. But contrary to popular belief, not all borrowers of cash loans are minorities. A recent analysis of the cash loans industry grants us insight into who the actual borrowers of this type of financing are.

Hard Data of the Pew Survey

Twelve million Americans borrow payday loans with every passing year. Each borrower takes out an average of $375 annually, but they spend a massive $520 on interest. A more detailed analysis of borrowers reveals their demographics.

Cash loan borrowers are usually white females between the ages of 25 to 44, according to a July 18th Pew Center survey analyzing payday lending in America.

Aside from this group, there are others that are inclined to borrow payday loans as well. These are people without four-year college degrees, people who rent homes, African Americans, divorcees, and workers who earn less than $40,000 a year according to the Pew Center data.

Even though it is common knowledge that lower income earners are more likely to borrow payday loans, there are certain attributes that can predispose a person to borrowing. Homeownership plays a role since low-income homeowners are less likely to borrow compared to high-income renters. Statistics from the Pew Center show that 8 percent of renters that earned $40,000 to $100,000 have borrowed cash loans. Compare this to 6 percent of homeowners that earned $15,000 to $40,000 who borrowed cash loans.

Common (outsider) belief dictates that people only borrow payday loans for emergency expenditures, such as car repairs or unexpected medical problems. However, we can see this is not true since Pew’s data reveals that cash loan borrowers take out an average of eight loans annually—each for a duration of about 18 days. Excluding the incredibly unlucky, it is clear that most cash loans are for regular expenses.

And Pew’s data supports that notion.

According to the Center’s statistics, 69 percent of borrowers used their loan to pay for regular expenses. Those regular expenses include utilities, credit card bills, rent, mortgage payments and other necessities. Only 16 percent of polled borrowers actually used their loan for an unexpected expense like car repairs and medical bills.

“Although payday loans are marketed as short-term emergency loans, in reality, most borrowers used them for recurring living expenses and become indebted for an average of five months,” said Nick Bourke, project director of Pew’s Safe Small-Dollar Loans Research.

Imagine a New World

Perhaps most interesting is the contemplation of a world—or at least a scenario—without cash loans. A sizable 81 percent of borrowers who were polled said that without cash lending, they would simply cut back on expenses like food and clothing. They also said they would attempt to borrow money from family or friends as well as selling and pawning possessions. 44 percent stated they would borrow from a bank or credit union while 37 percent said they would use a credit card. Only 17 percent said they would borrower from their employer.

The rise in interest in cash lending has led to some abuses and usurious practices in the past. This begs the question: how has regulation impacted the usage of cash loans?

In states with the most ironclad regulations, only 2.9 percent of residents said they had borrowed a loan within the last five years. In contrast, 6.3 percent of people reported borrowing a payday loan in the last five years in states with only “some” regulation and 6.6 percent of people borrowed a payday loan in states with minimal regulation.

Finally, in states where there are no retail lending stores, only five out of 100 potential borrowers opt to borrow cash loans online or from other alternative sources. The survey found that 95 percent simply opted not to use cash lending.

As the recession continues to strangle the country—and as the threat of a second recession remains an ever-present possibility—future research will reveal who continues to borrow cash loans. America will have to keep holding its breath and hope for better days with minimal cash lending.