How Borrowers Choose and Repay Payday Loans

QUICK SUMMARY

For someone in need of quick cash, a payday loan can look like a way to avoid asking loved ones for help or getting into long-term debt. But these loans usually prove unaffordable, leaving borrowers in debt for an average of five months.

This report—the second in Pew's Payday Lending in America series—answers questions about why borrowers choose payday loans, how they ultimately repay the loans, and how they feel about their experiences.

Key Findings 

1. Fifty-eight percent of payday loan borrowers have trouble meeting monthly expenses at least half the time.

These borrowers are dealing with persistent cash shortfalls rather than temporary emergencies.

2. Only 14 percent of borrowers can afford enough out of their monthly budgets to repay an average payday loan.

The average borrower can afford to pay $50 per two weeks to a payday lender—similar to the fee for renewing a typical payday or bank deposit advance loan—but only 14 percent can afford the more than $400 needed to pay off the full amount of these non-amortizing loans. These data help explain why most borrowers renew or re-borrow rather than repay their loans in full, and why administrative data show that 76 percent of loans are renewals or quick re-borrows while loan loss rates are only 3 percent.

3. The choice to use payday loans is largely driven by unrealistic expectations and by desperation.

Borrowers perceive the loans to be a reasonable short-term choice but express surprise and frustration at how long it takes to pay them back. Seventy-eight percent of borrowers rely on lenders for accurate information, but the stated price tag for an average $375, two-week loan bears little resemblance to the actual cost of more than $500 over the five months of debt that the average user experiences. Desperation also influences the choice of 37 percent of borrowers who say they have been in such a difficult financial situation that they would take a payday loan on any terms offered.

4.  Payday loans do not eliminate overdraft risk, and for 27 percent of borrowers, they directly cause checking account overdrafts.

More than half of payday loan borrowers have overdrafted in the past year. In addition, more than a quarter report that overdrafts occurred as a result of a payday lender making a withdrawal from their account. Although payday loans are often presented as an alternative to overdrafts, most payday borrowers end up paying fees for both.

5. Forty-one percent of borrowers have needed a cash infusion to pay off a payday loan.  

Many of these borrowers ultimately turn to the same options they could have used instead of payday loans to finally pay off the loans, including getting help from friends or family, selling or pawning personal possessions, or taking out another type of loan. One in six has used a tax refund to eliminate payday loan debt.

6. A majority of borrowers say payday loans take advantage of them, and a majority also say they provide relief.

The appreciation for urgently needed cash and friendly service conflicts with borrowers' feelings of dismay about high costs and frustration with lengthy indebtedness.

7. By almost a 3-to-1 margin, borrowers favor more regulation of payday loans.

In addition, two out of three borrowers say there should be changes to how payday loans work. Despite these concerns, a majority would use the loans again. In a state where payday storefronts recently stopped operating, former borrowers are relieved that payday loans are gone and have not sought them elsewhere.