New study puts a human face on payday loan borrowers

Inside Subprime: May 10, 2018

By Kerry Reid

When examining the payday loan industry, opponents often point to the dangers these high-interest, short-term loans can pose to low-income individuals, who may be trapped in an escalating cycle of debt. And while this is true, the argument makes it seem like only low-income households turn to these loans in times of crisis.

But as reported by Saleen Martin of the University of Georgia, a recent study by a team of researchers at UGA found that those who use the payday loan industry cut across all income brackets. Led by Mary Caplan, assistant professor in the School of Social Work at UGA, the study examined data drawn from the Federal Reserve Board’s 2013 Survey of Consumer Finances, which looked at financial information from 6,015 households, including income, debt, spending, pension and the use of financial services.

The study grouped borrowers into five separate income-based sectors and found that, while payday borrowing occurs in households across the financial spectrum, payday borrowers are more likely to be African American, living in a home they don’t own, without a college degree, and receiving some forms of government assistance such as SNAP (Supplemental Nutrition Assistance Program) or TANF (Temporary Assistance for Needy Families).

Payday loans take a toll on family finances.

A study by the Pew Charitable Trusts released in July of 2012 revealed that payday loans go to 12 million borrowers annually in the United States, leading to more than $7 billion in spending on these loans. As reported by Pew, “On average, a borrower takes out eight loans of $375 each per year and spends $520 on interest.”

It probably isn’t surprising that people from lower-income brackets would be more likely to turn to short-term high-interest payday loans (or auto title loans, which operate in a similar way but require putting up one’s automobile as collateral). When sudden expenses arise in the form of auto repairs, health emergencies or other can’t-put-it-off categories, people with lower income, fewer savings and bad credit often have no choice but to turn to payday lenders.

The UGA study also found that lack of family support is a big reason why so many people turn to payday loan operations. Robert Nielsen, professor and head of the consumer sciences department at the University of Alabama who helped analyze the data for UGA, notes “It’s nearly a two-fold increase in the likelihood that someone would turn to a payday lender if they don’t have a family member or a friend they can borrow $3,000 from.”

But why would people in middle-and-upper-income brackets have to resort to things like payday and title loans? According to Caplan, one reason is that even middle-class jobs lack the stability of past generations. “People in the so-called middle class used to have one job and keep it for decades,” she said. “This is no longer the case.” If they live in an area with a high cost of living, even a temporary period of unemployment can drain savings quickly and lead them to take out a payday loan.

Caplan also points out that the top quintile of the study includes a wide range of incomes, from households making $150,000 annually to millionaires and billionaires. That top 20 percent represents just over 1 percent of those using payday lending services. So while the top two groups are overall unlikely to take these loans, economic insecurity still leads people who might not have used payday lenders in the past to take out loans in an emergency.

Not just for emergencies.

The Pew study revealed that, for first-time payday borrowers, 69% used the money for recurring expenses, such as groceries, utilities, rent or mortgage or to pay existing credit card bills. Only 16% took the loan for an unexpected emergency.

Peter Kindle, an associate professor of social work at the University of South Dakota who worked on the UGA project, noted that for many borrowers, “There’s no other resource that’s available to some of them.” Pew’s study shows that without access to payday loans, 81 percent of borrowers said they would cut back on expenses such as food or clothing. A majority of borrowers also said they would delay paying bills, borrow from friends or family, or sell or pawn possessions. Only 44 percent said they would take a bank loan, 37 percent would use a credit card, and 17 percent would borrow from an employer.

As efforts to regulate the payday loan industry gain traction in some states and cities (with pushback from many sectors of the industry), the need to gain a fuller portrait of who is using these loans – and why — becomes even more important. Caplan says, “I think that when we characterize something as a problem of poor people, then it gets marginalized in our culture.”

To learn more about payday lending in the U.S., check out these related pages and articles from OppLoans:

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