Majority of Payday Borrowers Cannot Afford to Repay Loans
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UPDATED: Feb 27, 2013
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According to a recent report by non-profit Pew Charitable Trusts, only 14 percent of borrowers can afford to repay an average payday loan when it is due.
The Pew Charitable Trusts found that 58 percent of payday loan borrowers have difficulty meeting monthly expenses at least half the time. Borrowers that frequently use payday loans are likely to have persistent cash shortfalls, and not temporary emergencies.
The report states that a consumer’s choice to use payday loans is “largely driven by unrealistic expectations and by desperation.”
Pew reports that borrowers perceive the loans to be a reasonable short-term choice, but are then surprised by the length necessary to repay the debt. In addition, desperation causes about one-third of borrowers, 37 percent, to accept payday loans on any term offered, even if it is undesirable.
But a payday industry trade group disagrees with Pew’s findings.
The Community Financial Services Association of America (CFSA) believes that Pew’s research lacks vital context about the broader marketplace and the “importance of consumer choice and why 19 million Americans use payday loans each year.”
“Short-term credit products are an important financial tool for individuals who need funds to pay for an unexpected expense or manage a shortfall between paychecks,” the CFSA said. “Borrowers who choose to use payday loans may do so to avoid bouncing checks, paying overdraft protection fees, incurring late payment penalties, or turning to other credit options that can actually be more expensive that CFSA-member loans.”
The CFSA reports that the typical loan fee charged by association members is $15 per $100 borrowed.
The association also said the Pew report tends to generalize the industry.
“Pew unfairly paints the entire industry with a broad brush, overlooking the fact that CFSA members are licensed lenders and comply with all state and federal laws,” the association said. “In our current economy and constricted credit market, it is critical that consumers have the credit options they need to deal with their financial challenges.”