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Few financial products draw as much criticism as payday loans do.
Primarily because of high interest rates that hover around 400 percent, payday loans are often characterized as predatory, even criminal. This lending product is commonly targeted at low-income consumers who use payday loans as plugs that will keep the ship afloat temporarily.
>> Read More: How do payday loans work?
It is thought that the nature of the payday loan market creates a vicious cycle where borrowers’ financial limitations make it incredibly difficult to repay the loans on time, at which point they are slammed by outlandishly high APRs. Borrowers must then take out another payday loan to pay off their previous payday loans, and a cycle of unsurmountable debt is initiated.
Despite the negative stigma that clouds the payday loan industry, it is a booming industry. According to the Consumer Financial Protection Bureau (CFPB), payday loan companies collectively raked in roughly $3.6 billion in fee revenue in 2015. The CFPB also estimated that there are 15,766 payday loan stores throughout the U.S., slightly more than the country’s 14,350 McDonalds.
In early October, the CFPB passed new payday loan rules that they hope will combat the abuses in the industry. The new rules include a stricter borrower vetting process that involve a credit check, limiting the number of payday loans a borrower can take out during one time, and preventing lenders from withdrawing from borrowers’ accounts if they lack sufficient funds.
Throughout the U.S., payday loans are harshly criticized for their predatory nature by financial experts and politicians alike. But, chances are these people have never needed a cash advance.
Are payday loans really as harmful as everybody claims? LendEDU polled 1,000 consumers who have used a payday loan in the last year. The results may come as a bit of a surprise.
Full Payday Loan Survey Results
1. How many times in the last year have you used payday loans? In other words, how many payday loans have you used in the last year?
The average payday loan borrower used a payday loan 3.80 times in the last year, or 4 rounded up.
2. Did you look at the interest rate and fees on your payday loan(s) before borrowing?
a. 82 percent of respondents answered “yes”
b. 18 percent of respondents answered “no”
3. What was the amount you borrowed using the payday loan? Note: If you’ve used more than one payday loan in the last year, please put the average.
The average amount borrowed by a payday loan borrower was $442.16.
4. At the end of the day, did the payday loan make your financial situation better or worse off?
a. 44.20 percent of respondents answered “I was better off”
b. 30.30 percent of respondents answered “I was worse off”
c. 25.50 percent of respondents answered “I wasn’t better or worse off”
5. Do you regret using a payday loan(s)?
a. 51.00 percent of respondents answered “no”
b. 36.70 percent of respondents answered “yes”
c. 12.30 percent of respondents answered “undecided”
6. Did you explore other borrowing options (ex. installment loans, credit cards) before using a payday loan?
a. 66 percent of respondents answered “yes”
b. 34 percent of respondents answered “no”
7. Do you believe that payday loans should be illegal?
a. 59.50 percent of respondents answered “no”
b. 22.20 percent of respondents answered “yes”
c. 18.30 percent of respondents answered “undecided”
8. Have you ever used a payday loan to payoff another payday loan?
a. 65.30 percent of respondents answered “no”
b. 31.40 percent of respondents answered “yes”
c. 3.30 percent of respondents answered “prefer not to say”
9. Which of the following best describes your reason for using a payday loan?
a. 48.50 percent of respondents answered “to cover everyday bills (ex. groceries, utilities, rent)”
b. 15.80 percent answered “emergency automotive expenses”
c. 13.00 percent of respondents answered “emergency medical expenses”
d. 10.90 percent of respondents answered “to make payment on other debt (ex. credit card, mortgage, auto loan)”
e. 5.60 percent of respondents answered “to make a large purchase (ex. appliances, electronics)”
f. 3.60 percent of respondents answered “other”
g. 2.60 percent of respondents answered “entertainment purposes.”
10. Which of the following best describes your feeling about the application process?
a. 75.50 percent of respondents answered “I was well informed throughout the application process”
b. 24.50 percent of respondents answered “I was confused and misinformed”
11. Do you think payday loan borrowing limits should be increased or decreased?
a. 36.30 percent of respondents answered “unchanged”
b. 34.60 percent of respondents answered “increased borrowing limits”
c. 29.10 percent of respondents answered “decreased borrowing limits”
12. Do you think the government should enact more or less regulation on the payday loan industry?
a. 51.40 percent of respondents answered “more regulation”
b. 26.30 percent of respondents answered “undecided”
c. 22.30 percent of respondents answered “less regulation”
13. Did you pay back your payday loan(s) on time?
a. 79.70 percent of respondents answered “Yes, I paid on time”
b. 11 percent of respondents answered “I’ve done both”
c. 9.30 percent of respondents answered “No, I paid late”
14. Did payday loans save you money by avoiding bank fees such as bounced check fees, late fees, and overdraft fees?
a. 62.40 percent of respondents answered “Yes, I saved money on bank fees by using a payday loan”
b. 37.60 percent of respondents answered “No, I did not save money on bank fees by using a payday loan”
Observations & Analysis
The Basic Statistics Behind Payday Loans
Asking each of our 1,000 respondents to report both their average payday loan amount and the number of times they have taken out a payday loan in the last year, we were able to develop some basic payday loan statistics.
Over the past year, the average payday loan borrower has taken out four payday loans. Without rounding up, the average number of payday loans taken out by a borrower in the past year was 3.80.
How much were these loans amounting to? According to LendEDU’s polling data, the average payday loan amount over the past year was $442.16.
Combining those two average figures, you can surmise that over the last year, payday loan borrowers each took out a combined total of $1,675.79 in payday loans.
Payday Loan Borrowers Are Generally Supportive of the Product
One of the common assumptions about payday loans is that the lending product preys on the fiscally vulnerable. Borrowers, desperate to have cash-in-hand for whatever reason, eagerly jump on payday loans without fully understanding the risks and repayment policies. When all is said and done, the borrowers are left with much more debt than they anticipated and vehemently turn against payday loans.
Or so the story goes.
But according to LendEDU’s polling data, the vast majority of payday loan borrowers are generally satisfied with the product and show no regret for their decisions to borrower in this manner.
We asked 1,000 payday loan consumers the following: “At the end of the day, did payday loans make your financial situation better or worse off?
More borrowers stated that payday loans made their situations better, 44.20 percent, than those who believed the lending product made their situations worse off, 30.30 percent. An additional 25.50 percent of respondents indicated they were neither better nor worse off.
Another question pertaining to how payday loans impacted financial health was asked to our respondents. It read like this: “Did payday loans save you money by avoiding bank fees such as bounced check fees, late fees, and overdraft fees?”
Once again, the responses from this question indicated that there are more satisfied payday loan borrowers than there are dissatisfied. 62.40 percent of payday loan borrowers stated that the lending product did in fact save them money by avoiding bank fees, while 37.60 percent indicated that they saved no money by using payday loans.
Perhaps the most surefire way to tell if payday loan borrowers approve of the financial product is to gauge how they felt about their decision with the help of hindsight. To do this, we asked the following: “Do you regret using a payday loan(s)?”
The majority of poll participants, 51.00 percent, answered that they do not regret their decisions to use payday loans, while 36.70 percent stated that they did have some second thoughts. An additional 12.30 percent of payday loan borrowers were undecided.
If the results from these three questions depict anything, it is that we should not be so quick to jump to conclusions when it comes to the use of payday loans.
Are there incidences where borrowers are hit over the head with a 400 percent APR and find themselves in a gloomy predicament? Most definitely.
But any product in the world is going to have naysayers and people that got the short end of the stick. When it comes to payday loans, our data suggests that the majority of people who actually use the product are supportive of it.
For the Most Part, Payday Loan Borrowers Know What They Are Getting Into
To be honest, it came as a mild surprise that payday loan borrowers were largely positive about the lending product. But, this next series of questions may help explain things. In LendEDU’s poll, payday loan borrowers revealed that, for the most part, they have a solid grasp of the product before they get involved.
This question was proposed to our respondent pool: “Did you look at the interest rate and fees on your payday loan(s) before borrowing?”
82.00 percent of payday loan borrowers looked at the interest rate and fees before taking out a loan, while 18.00 percent did not. One of the major complaints regarding payday loans is the abnormally high interest rates that are charged, sometimes going above 500 percent. This could pose a problem for people that do not do their research and are lazy in repayment because they are expecting a measly APR of 15 percent. But, 82 percent of payday loan borrowers had a pre-knowledge of the interest rate, which should motivate them to pay on time.
As a catch-all question, the following was asked: “Which of the following best describes your feeling about the application process?”
More than three-quarters (75.50%) of payday loan borrowers chose the following response: “I was well informed throughout the application process.” Contrarily, 24.50 percent of respondents answered with this option: “I was confused and misinformed.”
Another popular criticism of payday loans is that borrowers are not made aware of the short repayment period, which generally ranges from seven to 30 days. So, we asked borrowers, “Did you pay back you payday loan(s) on time?”
Once again, more than three-quarters (79.70%) of the payday loan borrowers that were polled stated they paid back their payday loans on time. Only 9.30 percent of respondents indicated that they paid back their loans late, while 11 percent have been both timely and tardy.
Since it is clear that most payday loan borrowers have extensive pre-knowledge of the payday loan risks before they borrow, we wanted to find out if they had considered other lending options before going with payday loans.
The pool of 1,000 respondents were asked the following: “Did you explore other borrowing options (ex. installment loans, credit cards) before using a payday loan?”
Virtually two-thirds, or 66.00%, of payday loan borrowers indicated that they did explore other borrowing possibilities before coming back to payday loans. 34.00 percent of the poll participants went straight to payday loans without exploring the lending marketplace.
Despite conventional thinking, it appears that the vast majority of payday loan borrowers are well aware of the risks they undertook when they made the decision to take out payday loans. This is good. The safest way to avoid getting scammed and ending up in a financial blackhole is to do your research and fully understand all of the potential downsides that come with payday loans.
What Are Consumers Using Payday Loans For?
One of the attractions of payday loans is that they can be used for just about whatever the borrower needs them for. If they are behind on rent, struggling to make lease payments on their car, or simply need to buy groceries, a payday loan can be used.
To find out the most prevalent reasons for taking out a payday loan, we asked the following: “Which of the following best describes your reason for using a payday loan?”
As one can see from the pie chart above, the most common reason for using a payday loan was to afford everyday bills such as groceries, which was chosen by 48.50 percent of payday loan borrowers. The next most popular reason was to pay for emergency automotive expenses, which was selected by 15.80 percent of respondents. 13.00 percent of poll participants indicated emergency medial expenses are typically the reasons for using payday loans, while 10.90 percent used the financial product to make a payment on another debt.
5.60 percent of payday loan consumers use the product to make a large purchase like a television, and 2.60 percent of borrowers use the loans for entertainment purposes. An additional 3.60 percent of respondents selected “other,” implying their reasons were not one of the answer options.
Briefly mentioned in the introduction of this report, a common charge against payday loans is that they initiate an unforgiving lending cycle in which the borrower is never able to climb out of debt. This way of thinking leads many to believe that payday loan borrowers usually must use another payday loan to pay off the previous one.
To get to the bottom of this, we asked the following: “Have you ever used a payday loan to payoff another payday loan?”
Judging from the results of our poll of 1,000 payday loan borrowers, the healthy majority, 65.30 percent, of consumers do not use a payday loan to pay off another payday loan. Meanwhile, 31.40 percent of borrowers have used a payday loan for this purpose, and 3.30 percent preferred to keep their answers private.
Do Payday Loan Borrowers Want More or Less Government Oversight?
Recently, the issue of payday loans has worked itself into the forefront of Washington D.C. politics. In early October, the Consumer Financial Protection Bureau (CFPB) passed new payday loan borrowing rules that will tighten access to the financial product. Potential borrowers will now have to undergo a credit check before being issued a payday loan while also being limited to the number of loans they can take out at one time. The new rules cut both ways however, and lenders will not be able to draw from a borrower’s account if that borrower has insufficient funds to payback the loan.
LendEDU wanted to hear what payday loan borrowers thought about having Uncle Sam’s presence expand in the marketplace.
To get things started, we asked the following, rather blunt question: “Do you believe that payday loans should be illegal?”
The clear majority of payday loan borrowers, 59.50 percent, maintain that payday loans should be legal, while 22.20 percent supported banning the financial product. 18.30 percent of the respondent pool was undecided on the issue.
We then asked this question: “Do you think payday loan borrowing limits should be increased or decreased?”
Interestingly, the plurality of payday loan borrowers, 36.30 percent, believe the borrowing limits on payday loans are fine just the way they are. However, only a slightly smaller proportion of borrowers, 34.60 percent, wanted payday loan borrowing limits increased. Finally, 29.10 percent wanted to bring down the borrowing limits on payday loans.
The final question that will be discussed in this analysis read like-so: “Do you think the government should enact more or less regulation on the payday loan industry?”
It turns out that the majority of payday loan consumers want the government to enact stricter regulation of the payday loan industry. 51.40 percent of our respondents believed this was the proper course, while 26.30 percent of borrowers were undecided in terms of regulation. 22.30 percent of payday loan borrowers wanted there to be less regulation of the payday loan industry.
This was certainly one of the more eye-catching data-points from this entire poll. Payday loan borrowers themselves want the government to have more oversight of the payday loan industry, even if that would mean having a more difficult time accessing the financial product. This was also interesting because it ran contrary to most of the results from this poll. In general, payday loan borrowers were very supportive of the lending product, yet they still believe the government has a part to play in making the industry safer and less prone to predatory behavior.
All data that was used in this report came from a poll commissioned by LendEDU and conducted online by polling company Pollfish. In total, 1,000 adult respondents from the U.S. were polled on each of the questions. Respondents were filtered to ensure they had used a payday loan in the last 12 months. This filtering process was aided by a screener question with only one permissible answer choice. The poll ran over a four day span from October 27, 2017 to October 30, 2017. All respondents were asked to answer each of the questions truthfully and to the best of their ability.
See more of LendEDU’s Research
Image Copyright © Steve Rhodes
Author: Mike Brown