Payday Loans: Still Popular, Still a Raw Deal

Photo (cc) by taberandrew

Payday loans are a $7.4 billion-a-year business, despite tough regulations in 22 states that ban them or limit interest rates.

Maybe that’s not so surprising, given that a majority of Americans (55 percent) live in the other states, some of which still allow these lenders to charge more than a 500 percent annualized interest rate and net $20 per $100 borrowed on a two-week payday advance loan.

More surprising from a new Pew Charitable Trusts study on payday loans is the most common borrower: “Employed, white, female, and 25 to 44 years old.”

The heaviest users of payday loans earn less than $40,000 a year, rent their home, lack a college education, or are African-American. They’re more likely to get stuck in a payday loan cycle: borrow hundreds for what they can’t afford, get paid and repay the loan plus crazy fees, then borrow again because they have less than before.

As Pew explains it, “an average borrower is in payday loan debt for five months per year, using eight loans that last 18 days each.” The average loan size: $375. The average interest paid across eight loans: $520.

More than 1 in 20 Americans have used a payday loan in the past five years – even though most of them know better. Only 16 percent sought the loans for emergency expenses. Most ignore cheaper alternatives and avoid smarter spending.

“If payday loans were not available to them, 81 percent of borrowers reported they would cut back on other expenses instead,” Pew says. “Majorities also would delay paying bills, borrow from family or friends, or sell or pawn possessions.”

In addition to those ideas, consumers could try these alternatives from the nonprofit Center for Responsible Lending

  • Work out a payment plan with creditors
  • Ask for an advance at work
  • Find a community-based emergency assistance program
  • Get a loan from a credit union
  • Get a cash advance from a credit card
  • Turn to small consumer finance companies, where rates average between 25 and 60 percent

If you know anyone who uses payday loans, encourage them to investigate cheaper options and consider credit counseling to find a way out of the debt cycle – because the payday lending landscape doesn’t look any better now than it did in 2010.

We last wrote about payday lending in Payday Lenders Dropping Like Flies, just over two years ago. At the time, things were looking hopeful: Arizona had just made the practice unprofitable, and lenders were abandoning the state. The newly created Consumer Financial Protection Bureau was poised to crack down on lenders who were estimated to be raking in more than $4 billion in fees.

In mid-2012, Pew tells us these lenders are bringing in $7.4 billion off the backs of the working poor. Major banks such as Wells Fargo and Regions (which are largely exempt from the laws applying to payday lenders) are getting in the game and making loans with annual rates that come out to more than 300 percent, according to The New York Times. They deposit the funds into the customer’s bank account, and when time’s up, they suck them back out – plus fees. If you don’t have funds to cover the withdrawal, too bad. You’ll just have to pay the bank for the overdraft charges they just caused, and keep paying until you have a positive balance.

Meanwhile, Congressmen such as Joe Baca (D-Calif.) are trying to introduce laws that could potentially open the floodgates of predatory lending by bypassing the CFPB and blocking state-level consumer protections. The Center for Responsible Lending has more details about Baca’s proposal, HR 1909, which hasn’t been considered by Congress yet.

In the past year alone, Baca has received $22,400 in campaign contributions from the finance/credit industry – $15,750 from commercial banks and $30,600 from uncategorized lobbyists, according to OpenSecrets.org.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
Can My Wife Use My Social Security Benefits While Letting Hers Grow?
Can My Wife Use My Social Security Benefits While Letting Hers Grow?

Your self-discipline in not uttering three little words helps determine whether you can use a key claiming strategy.

Grow Your Savings in 2020 With These 5 Tricks
Grow Your Savings in 2020 With These 5 Tricks

Saving money doesn’t have to be painful. Here are some ways to game yourself into stashing more cash.

Small Splurges That Make It Feel Like You’re Living Large
Small Splurges That Make It Feel Like You’re Living Large

Cutting costs is the shortest path to financial freedom. However, there are times when a little spending can produce big returns.

Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?
Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?

You could save more than $30,000 by setting aside these costly expenses for just one year.

Top 5 Activities That People Dream of Doing in Retirement
Top 5 Activities That People Dream of Doing in Retirement

No. 1 isn’t visiting grandkids, and No. 4 might surprise you.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

9 Deep Discounts Available on Amazon This Friday
9 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

15 Products You Need — Even If You Didn’t Know It
15 Products You Need — Even If You Didn’t Know It

Discover some must-have products on Amazon that you didn’t even know you were missing.

Do This in the Car If You Want to Avoid COVID-19
Do This in the Car If You Want to Avoid COVID-19

It takes just seconds to take this simple preventive measure.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.