Who Is Using Payday Loans In The USA?
To prevent consumers from being overextended by these historically high-cost loans, several states have taken steps to lower the interest rates on payday loans in recent months.
For instance, Nebraskans voted in overwhelming numbers to limit payday loan interest rates at 36% during the November general elections. The average payday loan interest rate was 404% before the ballot initiative passed.
The Illinois state legislature also passed a bill in January that would set a 36% rate on consumer loans. The bill is still waiting for a signature by the governor. However, once signed, Illinois will be the latest state that has a rate cap for payday loans.
Who applies for payday loans?
These small-dollar loans can be obtained in more than half of the U.S. without any restrictions. To get one, consumers need to present a valid ID and proof of income to a lender.
The Center for Responsible Lending calculated the average APR for $300 loans in each state, based on a 14-day loan period. This was to help consumers understand the recent changes.
Payday lenders generally levy a “finance fee” for every loan. This includes interest and service fees. Consumers don’t always understand how much they are paying.
How much interest do the loans attract?
Interest rates can skyrocket in states without rate caps. Texas has the highest rate of payday loans in the United States. The average APR for a loan is 664%. This is 40 times higher than the average credit card interest rate of 16.12%.
Texas’ position is quite different from Ohio‘s 3 years ago when Ohio had the highest rate for payday loans at 677%. Ohio has lowered the rate to 138% by imposing restrictions on interest rates, loan amounts, and lengths. This was in effect in 2019.
According to CRL, around 200 million Americans live where payday lending is allowed without restrictions. These loans are sought after by consumers even during the current pandemic.
A recent survey of 530 small-business workers revealed that the rate at which workers took out payday loans increased by three times due to the pandemic.
About 2% reported that they had used a payday loan before the outbreak, while 6% reported that they had used it since March.
How expensive are payday loans?
Payday loans are easy to obtain in some areas of the United States, but they can also be costly and difficult to repay. The Consumer Financial Protection Bureau’s research found that almost one in four payday loans are reborrowed over nine times.
According to The Pew Charitable Trusts, the average loan repayment takes five months and the borrower pays $520 in finance fees. This is in addition to the original loan amount.
In addition, to repeat borrowing, there is an increase in the chance of overdrafts and losing a bank account or bankruptcy, and difficulty paying bills. Other research has also shown stress from high-cost loans can have negative health effects.
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