USA Payday Loans And Their Regulation

Two mean are shown calculating the cost of a payday loan
Advantages And Disadvantages Of Payday Loans
Part 1 USA Payday Loans And Their Regulation
Part 2 Payday Lenders And Common Practices
Part 3 Can A Payday Loan Help You?
Part 4 Considerations About Short Term Payday Loans

Payday loans are now part and parcel of life in the US. Used as a form of emergency borrowing, payday loans have replaced the underground illegal lending that had been a part of American life for over 100 years. In this article we look at:

  • Some history behind payday lending
  • Payday loans and bans
  • National statistics about payday lending
  • Who uses payday loans

As with every other financial product there are advantages and disadvantages associated with the loans. This article in the series about online credit in the US will look at both sides of the argument and highlight both the benefits and drawbacks of using payday loans.

Background studies on payday loans

Before getting down to the details, it is worthwhile having a look into the background of payday loans including an interesting case study. We can also look at some facts and figures about the kind of people who use payday loans and why they choose this form of borrowing instead of going to mainstream lenders.

Over one hundred years ago, illegal lending was quite common in the US. A ‘salary lender’ would offer a loan against the next weeks wage and interest rates were high, as much as 500% APR. In order to get people to repay a salary loan, lenders often resorted to abuse or threatened public embarrassment. Many people had an advance against their wages from the company where they worked and if they could not pay on time they were intimidated by the threat of losing their job.

About 16% of people who use payday loans use the funds for emergencies

Trying to put a stop to this form of intimidation, policy makers put a cap on usury lending rates and this was set at 3.5% interest on loans of $300 with two thirds of the states complying to some version of the rules. This meant that borrowing was allowed at between 18% APR and 42% APR depending upon the individual state.

Eventually, by the middle of the 20th century, state laws were not enough to cope with the new rash of national lenders and banking deregulation meant that the old usury laws no longer applied. Payday loans became legal and from the middle of the 1990s, the industry grew exponentially.

Why is there no ban on payday loans?

Considering the huge amount of interest that is charged and the well publicized cases of payday loans that have caused serious financial problems, you might be wondering why this kind of borrowing is still legal. The fact is that there is a demand for payday loans simply because many people have no access to banking facilities or mainstream lending. This might be because they have a poor credit rating or because they have never borrowed before. They may also have simply have fallen through the system due to unfortunate circumstances.

A young woman is shown applying for payday loan online on her laptop

It is also more likely that they are on a low income, work part time or are in and out of work. Anyone who is on a tight budget may need a payday loan at some point and most people do not use this kind of loan for frivolous purposes. Most loans are taken out so that an unexpected expense can be paid.

An important report on payday loans

In 2012, the Pew Charitable Trusts produced a report on payday lending in the US. The key findings of report showed that borrowers in the US took out a staggering $7.4 billion in loans using both storefront lenders and financial websites. Many people struggled to clear the loan at the designated repayment date and had to carry over the debt for another month or even longer.

Anyone who is on a tight budget may need a payday loan and most people do not use this kind of loan for frivolous purposes.

The publishers of the report were concerned that the payday loan industry was not working as advertised and consumers were taking out a two week loan that ended up keeping them in debt for up to five months. Lenders rely heavily on renewals or rollovers to increase their profits and some people were paying much more in fees than the original interest figure quoted.

Payday lending figures for the nation

The Pew Report showed that 5.5% of all adults had used a payday loan. The average sum borrowed was $375 but an additional $520 was being paid in interest. Some borrowers were taking on as many as 8 loans a year. Most used traditional store front lenders with only 25% of consumers using online credit websites.

Who uses payday loans?

The statistics from this important report highlighted the fact that nationally most payday borrowers were white females and they were aged between 25 and 45. There were also five other characteristics that defined those most likely to use a payday loan.

A couple are shown having an argument about their debt situation

More payday loan borrowers rented their home, did not have a college degree, earned below $40,000 per year, were African American and were either separated or divorced. These are not surprising figures as these groups of people are clearly some of the most disadvantaged and often have no access to the normal lending channels.

Why do borrowers use payday loans?

One of the facts to come out of the report was that ordinary people were using this kind of loan to cover their day to day living expenses. The loans are specifically designed to be used as emergency funding so this was a somewhat shocking result.

Case histories showed that 69% of people used the loan to cover a regular expense like the payment of rent, to buy food or to pay a credit card bill. Only 16% said that they used the funds for emergency expenses such as a car repair or emergency medical bill.

Advantages And Disadvantages Of Payday Loans
Part 1 USA Payday Loans And Their Regulation
Part 2 Payday Lenders And Common Practices
Part 3 Can A Payday Loan Help You?
Part 4 Considerations About Short Term Payday Loans

About the author

Mark Larsen

Mark Larsen has worked in the finance industry for over 20 years. Over the course of his career, Mark has amassed experience in personal finance and especially short-term lending. He shares his valuable insights on onlinecreditusa.com