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Tags: Payday | Loans | Living | Costs

Study: Millions Use Payday Loans for Daily Living Costs

By    |   Friday, 20 July 2012 11:50 AM EDT

Each year, 12 million Americans spend $7.4 billion on payday loans, and seven out of 10 borrowers use these loans to cover ordinary living expenses, a new report from Pew Charitable Trusts shows.

These short-term, high-interest loans are typically marketed as a solution for the occasional cash crunch, but the data show most do not use them for unexpected expenses.

In the past five years, 5.5 percent of the adult population have used a payday loan, Pew found.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

While the loans are designed to help with unforeseen events, 69 percent of first-time borrowers used their loans to cover recurring living expenses, such as utilities, credit-card bills, rent or mortgage payments or food. Only 16 percent used the loans to cover unexpected expenses, such as a car repair or an emergency medical expense.

For the average borrower, it is not a one-time deal. In one year, a payday loan borrower tends to take out eight loans of $375 each, spends $520 on interest and is indebted for five months.

This often occurs because borrowers cannot make the lump sum payoffs that they agreed to and they end up renewing the loan multiple times.

Most of these borrowers are employed, white, female and aged 25 to 44 years. After controlling for other factors, home renters, black Americans, those without a college education, those who earn less than $40,000 per year and those who are separated or divorced have higher odds of using a payday loan.

Pew noted that while lower income is associated with a higher likelihood of using a payday loan, other characteristics are more predictive of their use.

There are more than 20,000 storefront lenders currently in the United States, as well as hundreds of online lenders. In 2003, there were only 3,000 storefront lenders, The Huffington Post reported.

Moreover, three-fourths of the borrowers went to storefront lenders, while one-quarter went online. In states that have implemented regulations to eliminate storefronts, the survey found much lower payday loan usage.

Specifically, 2.9 percent of adults in states with regulations reported using a payday loan in the previous five years compared with more than 6 percent of adults in the states that have storefronts.

Consumer advocates are highly critical of the payday lending industry because its profits rely on the extension of loans for a fee, which means there is little incentive for lenders to help desperate borrowers trying to climb out of debt, The Post reported.

If faced with a cash shortfall and payday loans were not available, 81 percent of borrowers in the survey said they would cut back on expenses such as food and clothing. Most would also delay paying bills, borrow from family or friends or sell or pawn possessions.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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Friday, 20 July 2012 11:50 AM
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