In the US, 12 million Americans make use of payday loans each year. Between them, borrowers pay 23,000 regulated lenders a total of around $9billion in payday loan fees annually.
This outlines how expensive this form of debt is, and why you should be certain that you need a loan before applying for one.
Over the last five years, around 6 percent of over-18s in the US have borrowed a loan from a payday lender.
What Is A Payday Loan?
Payday loans are short-term loans granted to those who need financial support because their current costs are too much to handle. Payday loans are an unsecured form of debt, meaning that no collateral (an asset such as a car or property) is declared within the contract.
The average borrower puts their payday loan towards paying for unexpected medical bills, dental costs, car repairs, urgent household work, or the cost of a funeral.
When you desperately need cash to cover life’s costs, you could apply for a payday loan. Remember, these loans bear an average interest rate of 396% APR, meaning they are not a cheap means of borrowing.
Who Uses Payday Loans In The US?
Among the 12 million annual borrowers of payday loans, there is a wide spectrum of borrowers. However, from related data, it is easy to spot a few trends which point us in the direction of your average borrower.
- Those In Their Twenties Are Most Likely To Take Out A Payday Loan. Specifically, those in the bracket between 25 and 29 constitute 9% of national borrowers, compared to the 70+ range who make up a mere 2%. Those in their early-to-mid thirties make up a further 8% of borrowers, while those nearer to 40, and within their 40s, make up 7%.
- Renters. Those who rent their homes rather than owning them are almost 60% more likely than homeowners to take out a payday loan.
- Those Who Have Borrowed Before. 80% of payday loans are taken out within two weeks of paying off a previous payday loan, while 75% of borrowers have taken out a payday loan before.
- Those With Lower Income Or No Income. Those with an annual household income less than $40,000 are 62% more likely to take out a payday loan, for example students.
- Those With Regular Expenses Which They Struggle With. 7 in 10 payday loans is used to cover the cost of regular bills, such as rent and electricity. Meanwhile, 56% of borrowers struggle to make ends meet when it comes to regular costs.
Where Are Payday Loans Legal?
The states which prohibit lenders from issuing payday loans are Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia. If you don’t reside in one of these states, you can quickly and easily secure a payday loan.
California boasts the highest number of lenders with almost 2,500 spread across the vast state! After California, Texas is right behind with over 1,600 lenders, and Tennessee takes third place with 1,344. Rhode Island offers the fewest lenders with only five regulated payday lenders operating there.
What Does The Average Payday Loan Look Like?
The average loan is $375 and is borrowed for a two-week term. Typically, a borrower for a loan of this sort earns around $30,000 annually. Once their loan is secured, it is likely that the borrower will struggle to pay it back given that only 14% of borrowers easily pay off their loans.
How Much Would A Loan Cost Me In Borrowing Fees?
Let’s say your household heating system requires a repair and that will cost you $1,000, but your next paycheck isn’t due for two weeks. In such a case, you may choose to borrow $1,000 for a two-week period, which is the average loan term on payday loans in the United States.
You instantly owe back what you borrowed: $1,000.
APR (interest for the whole year) would be 36% of $1,000, which is $360.
Now, you are only borrowing for two weeks. That means you are only borrowing for 1/26th of the year, and therefore only owe 1/26th of $360. That is $13.85 in interest for two weeks. If you rollover that payment for another two weeks, then that interest doubles.