Each year, millions of Americans borrow small sums to help them pay for everyday expenses when they do not get enough hours at work or come up short financially for other reasons. And over more than 10 years of research and advocacy, The Pew Charitable Trusts has helped inform the creation of effective policies to make financial products for these borrowers safer, more transparent, and widely available, saving consumers billions of dollars annually.

In 2011, when Pew started researching this issue, banks offered these customers few options other than checking account overdraft, which cost consumers more than $15 billion in fees as recently as 2019. At the same time, payday lenders distributed millions of single-payment loans with interest rates exceeding 300% to borrowers who usually could not afford the payments without quickly taking another loan to cover their expenses. Payday loans proved to be deceptive and harmful, trapping vulnerable consumers in a cycle of costly long-term debt.

More than a decade later, however, better options exist, even for borrowers with damaged or no credit histories. Instead of fee-based overdraft, many banks offer small loans that are repayable in installments over several months at a small fraction of the price for a payday loan. And several states, such as Virginia, modernized their lending laws to require affordable installment payments and fees that are four times less than those for conventional payday loans. These advances are saving millions of consumers billions of dollars a year while expanding the availability of safe and affordable credit.

But problems in the small-dollar loan market persist. Many banks continue to charge billions in overdraft fees and do not yet offer affordable loans. Payday lenders still issue harmful loans in more than two dozen states that have not reformed their laws. And some lenders seek to evade consumer protections, including through “rent-a-bank” schemes in which they pay small banks to originate their high-cost loans in states where those loans are normally prohibited. However, as more banks develop affordable small-dollar installment loans or lines of credit and more states protect consumers from harmful payday loan terms, this market continues to improve. 

A customer leaves a payday loan store on Frederick Rd. in Gaithersburg, Maryland.
A customer leaves a payday loan store on Frederick Rd. in Gaithersburg, Maryland.
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Payday Loans and Overdraft

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Since the 1990s, millions of Americans have borrowed small sums of money each year through payday lenders or by overdrafting their checking accounts, often with poor results and high costs. But the market for small-dollar credit has improved substantially in recent years, thanks to state and federal reforms.

Exterior view of a Payday Loan Store in downtown Chicago, Illinois, 2019. (Photo by Interim Archives/Getty Images)
Exterior view of a Payday Loan Store in downtown Chicago, Illinois, 2019. (Photo by Interim Archives/Getty Images)
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How to Reform State Payday Loan Laws

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Modern payday lending, with its two-week timelines, high costs, and lump-sum payments, emerged in the early 1990s. According to The Pew Charitable Trusts' most recent market scan, 18 states and Washington, D.C., do not have payday loan stores because their laws limit interest rates and other terms, while four of the remaining 32 states have enacted comprehensive payday and small-dollar loan reforms.

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Banks Are Transforming the Small-Loan Market

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Since 2021, nearly all of the 25 largest U.S. banks have substantially improved their overdraft policies. That’s good news for consumers. But because a third of bank customers who overdrafted viewed it as a way to borrow money, consumers would also benefit from banks starting to offer safe, small installment loans or lines of credit. More good news: As of early this year, six of the eight largest banks had done just that.

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What Does the Research Say About Payday Loans?

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Millions of people use payday loans each year to borrow small amounts of money to make ends meet. Alex Horowitz, who has led Pew’s small-dollar loans research for over 10 years, looks back at major developments in payday loans over the past 30 years.

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Housing Policy Initiative

Pew is extending its work to protect financially vulnerable consumers through a new project that aims to increase access to small mortgages and housing availability in communities throughout the U.S.

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The Pew Charitable Trusts’ housing policy initiative works to help policymakers reimagine their approach to housing by illuminating how regulations and statutes drive the housing shortage and rising costs.

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Reforming Payday Loans Can Save Consumers Billions