According to payday loan analysis by Pew Charitable Trusts, more than 12 million Americans borrow in excess of $7 billion annually in payday loans. Its findings also conclude that the average borrower receives eight loans at $375 and pays $520 in annual percentage rate (APR) interest annually. There is also an indication that state regulations reduce storefront borrowing yet boost online payday loans in Kansas because of restrictions to loan amounts and repayment terms.
What Type of Person Takes Out Payday Loans?
Pew Charitable Trust found that there are certain groups that take out the most payday loans, including those who earn less than $40,000 annually, do not have a college degree, are single-family households and rent homes. Here are five more groups that choose payday loans.
People Who Need Immediate Access to Cash
Payday lenders are convenient solutions that allow borrowers to get what they need quickly. There are no application fees, waiting times or need for collateral, which makes it a consumer-friendly way to overcome emergencies since financial institutions are unlikely to approve a small dollar loan amount as there is no potential for a return on investment (ROI).
Those Who Do Not Want to Compound Loan Interest
If you have a credit card, you know it is easy to build up a balance. The credit companies have lower APR but add to your balance every month, which compounds quickly. A payday loan transaction is open for a short period while the accrual of interest on your credit card is long-term. It is also a cheaper solution than late charges or overdraft fees.
Those Who Want to Avoid Borrowing From Family or Friends
How do you feel about borrowing from loved ones? How do you feel when someone says no? Borrowing or lending between family and friends is a primary reason that relationships break down. When you borrow from a payday lender, you know what to expect and understand the business arrangement. It allows these borrowers to develop a business relationship with a lender that will be there when they are needed.
Those Who Do Not Have Credit
What is your credit score? It is an issue that affects people from getting long-term loans or credit cards. A negative credit history will also affect a borrower for seven years, which will prevent people from getting approved for a car loan, a mortgage or a bank loan.
Those Who Want to Establish a Credit History
A payday lender focuses on your current status and not your past which will help you build trust within the financial community. If you want to buy a car or apply for a store credit account, your payday loan payment history will help establish creditworthiness.
What Do Borrowers Use Payday Loans for the Most?
Payday loans are most likely to be used for unexpected financial hardships or recurring bills:
- Nearly seven out of 10 first-time borrowers needed a short-term loan for monthly bills like rent, utilities, monthly credit card bills or food expenses
- Nearly two out of ten 10 so for unexpected medical care or car repairs
Consumers also saw payday lenders as the best short-term solution for emergency money.
