Millennials Fall Prey to the Payday Loan Debt Trap

Inside Subprime: Sept 6, 2018

By Lindsay Frankel

Personal debt in America is growing, according to Northwestern Mutual’s 2018 Planning and Progress Study. The average individual has racked up around $38,000 in debt, a $1,000 increase from last year. The problem is even more profound for Millennials between the ages of 25 and 34. This group is carrying an average of $42,000 per individual, and credit card debt is the biggest culprit, not student loans.

For millions of Millennials, payday loans are adding to the debt problem. That’s because these loans carry a national average annual percentage rate of nearly 400 percent, more than 20 times the interest rate on the average credit card. But for people who lack credit history or have bad credit, these risky loans may seem like the only option. Advertised as fast cash, payday loans can be obtained from a storefront using the borrower’s paycheck as collateral. If the borrower is unable to pay back the loan right away, the resulting interest and fees can result in a debt trap.

That’s what happened to one 28 year-old Millennial, who said he borrowed from three different payday lenders in Texas to pay off previous loans. “The three loans were revolving — I was borrowing money from one to pay off the other one. I was having to drive all over where I live because they were in different locations every three days just to get the money to pay them off,” he said.

Payday lenders are plentiful in Texas, and they charge an average annual percentage rate of 454 percent, according to Pew Charitable Trusts. There are 1,675 payday lenders across Texas, which exceeds the number of McDonald’s restaurants by over 1,000. But while the demand is high for payday loans, these risky products are exacerbating the debt problem for young people.

Despite the exorbitant interest rates and fees on payday loans, over half of Millennials ages 22-37 have considered using a payday loan, according to a survey conducted by CNBC Make It in conjunction with Morning Consult. And 13 percent reported that they used payday loans in the last two years. Most of these borrowers pay more in fees than the original amount of the loan, according to Pew.

While payday loans are growing in popularity among millennials, research shows that most borrowers can’t afford to pay them back. Most people who use payday loans can’t afford to pay more than 5 percent of their paycheck towards a loan payment while staying on top of their expenses, but the average payday loan costs 36 percent of the average borrower’s gross paycheck.

It’s unclear why so many young people are using payday loans, but some hypotheses include a lack of financial literacy or credit history. As the industry becomes increasingly deregulated, it’s important for young people to educate themselves about the risks of using payday loans, and for financial institutions to develop safer alternatives that build credit.

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