The world economy has become more and more complex and volatile in recent decades. Income inequality continues to rise. Meanwhile, companies find new ways to make money. Financial ‘products’ abound, including those targeted at people who can’t get other types of credit.
This oversupply has worked to spur the phenomenonal growth of short-term consumer cash loans in the past 20 years. Offered by businesses rather than banks, ‘payday’ loans are specifically marketed to people who aren’t making ends meet each month.
Industry representatives say that payday type services bring economic benefits to all kinds of borrowers and meet an unsatisfied need ignored by traditional lenders. No traditional credit check and no collateral are required to get these single payment loans for relatively small amounts.
Critics counter that such companies are predatory, taking advantage of people with nowhere else to turn for financial solutions. And indeed, some authorities have enacted regulation. One example is the UK. There ‘rollovers’ (renewing a single payment loan) were restricted and fees capped in hopes of making payday loans cheaper and safer. When expressed as an annual percentage rate, payday loan fees can equal interest of 300 to 1,000%.
Regardless of which view one holds, the rapid growth of the payday industry undeniably demonstrates a strong consumer demand.
A mystery profile
So, who are the people taking out these high-cost loans? The United States particularly has seen a fair amount of research on the topic. Numerous surveys and interpretations have been done by industry, academia and nonprofit organizations. However, pinpointing who payday borrowers are is an ongoing affair that has yielded contradictory claims.
Further, online lending is a rapidly growing component of the global small-dollar credit industry. Other factors too — like local housing market booms or resource industry crashes — are clouding efforts to construct one borrower profile.
One recent large-scale analysis by US nonprofit MDRC reconfirmed what studies worldwide agree is the only certain characteristic of a payday borrower. People taking short-term high-cost loans have a stable income but that income isn’t enough to make ends meet.
Nonetheless, to begin sketching a general picture, we can turn to a source cited by various US reports. Crunching data from a 2007 US triennial Survey of Consumer Finances, researchers found that heads of payday-reliant households tended to:
- Be younger than 45 years old
- Be single women (42%) or part of a couple (40%)
- Have a high school education (39%) or some college (27%)
Minority families were more likely to have borrowed from a payday lender than white families, as were military families.
Moderate income but less wealth
But the anatomy of a payday borrower of course intersects with other variables that may or may not be a function of a particular set of demographics. That same US data can nonetheless illustrate financial commonalities amongst the people turning to a payday lender.
Because payday loans require a steady income, the lowest income person is not the most likely to get one. That US survey showed that payday borrowers’ median income was $30,892 while non payday using families’ was $48,397.
More of a contrast was found when looking at people’s accumulated wealth. Payday loan borrowers median net worth was $0 compared to non payday users’ of $80,510. Families who withdrew a payday loan owned assets valued at a median of $4,550. Households who didn’t use payday services had median assets 44 times larger at $201,000.
Similar issues arise in other countries. In Norway, where renting is widely considered a waste of money and house prices have soared, young people get desperate. Without savings, some take consumer loans (also high interest but can be a bit longer-termed than payday type) to obtain mortgage loans from the bank. There such a decision could mean paying 13% instead of the 3% offered at a communal bank.
Debt smaller but steeper
Earning and owning less, and less likely to get standard forms of credit, the average payday borrower has a lower total debt load than someone who doesn’t use payday loans.
However, a payday borrower’s monthly debt payments are more likely to be high interest and eat up more of their income. A 2007 US industry-sponsored study acknowledged that nearly a third of payday borrowers face monthly debt payments that take 30%+ of their income. Another 12.9% had monthly had to pay between 20 and 29% of monthly household income.
Such debt service levels would very likely prevent customers from getting additional credit from mainstream lenders. This leaves nearly half of payday borrowers at risk of rolling over that debt and paying another fee. Worse still they might need to turn to another/other payday lenders for additional payday loans.
That spiral is the source of another shared characteristic amongst payday borrowers: they’ve had past credit troubles. Analysis of the SCF data found that 33% of payday borrowers who applied for any type of loan within the last five years had been denied. That’s compared to 10% of non payday loan-using applicants.
Worryingly, the credit-troubled trait is beginning to manifest more widely.
The US payday industry’s own data shows payday borrowing has shot up among those who formerly had prime credit ratings. These were people who had high earnings and good credit behavior but who hit hardship and found themselves without the financial resources to weather it. Payday-loan borrowing among this segment jumped by over 500% in just 18 months (February 2010 to August 2011), says nonprofit MDRC.
Finally, there are no doubt various social and psychological factors influencing a person’s decision to take a payday loan. However, research gives only hints as to whether living paycheck to paycheck might cause or create coping or contributory mindsets.
For example, surveys done for a 2010 law review article found that a US payday borrower has low confidence in their financial self-control. Only 27% of payday borrowing households surveyed considered themselves savers, compared to 48% of families who hadn’t taken payday loans.
Conversely, the survey found that a payday borrower generally believes they’ll pay back the loans in a short time — despite widespread statistics to the contrary.
Further, that research revealed that most payday lenders are repeat customers. Respondents said they find payday services more convenient, less intimidating and less embarrassing than getting a loan from another source.