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Who Uses Payday Loans in the USA | Why Do People Use Payday Loans

By June 20, 2022June 24th, 2022No Comments
Who Uses Payday Loans in the USA | Why Do People Use Payday Loans

Who Uses Payday Loans in the USA?

Payday loan rates and conditions might vary greatly from state to state. Because of the dangers of debt traps that payday lenders pose, several states do not allow them within their borders. Payday loans may be regulated at three levels in jurisdictions where they are legal.

High APRs and costs for lenders are permitted in permissive states, which generally have the fewest regulations. Hybrid forms tend to impose more significant limitations, such as rate ceilings, limits on the number of loans a borrower may take out, or longer payback terms for borrowers. Payday lenders can’t open a business in restrictive states since they either don’t allow them or have an APR rate limit of 36%.

Seven percent of urban dwellers and 7 percent of people in the Midwest use payday loans regularly.

What Precisely Are “Payday Loans?”

Short-term loans with high-interest rates, such as payday loans, are supposed to help people in a financial emergency. Payday loans may be a lifesaver for many who struggle to pay their bills, are in debt, or have terrible credit.

These loans, however, are not without danger, and the payday lending business is notorious for its unscrupulous practices. Understanding how payday loans operate, who uses them, and how they use them is critical before determining whether or not to take out one of these loans. Bankrate gathered data on American payday loans.

How Do Payday Loans Work?

Once your income and checking account information are verified, a payday lender will deliver the money to you in a shop or the next day if you apply online.

Your signature on a cheque or authorization to electronically withdraw money from your bank account will be required in exchange. The loan is repaid on your next payment, which is usually within two weeks but may be as long as a month.

You might return to the business before or on the loan’s due date if it was given there. If you fail to show up, the lender will either run a check or make a withdrawal for the loan amount and any interest. Online lenders use an electronic withdrawal.

What Are The Dangers of Payday Loans?

People can depend on payday lending organizations since the loans are due rapidly and the costs keep rising. Borrowers typically find it difficult to satisfy their monthly obligations when faced with these conditions. Payday loan borrowers are often saddled with many debts, which only exacerbates their predicament.

If you depend on these loans to meet your bills, you’ll have less money each month and may fall behind on your paychecks.

What Are the Payday Loan Statistics?

  • Payday loans are used by 12 million Americans each year.
  • The typical two-week payday loan costs $375, with fees averaging $520.
  • The average payday loan APR in Texas is 664 percent.
  • Only 14% of those who take out payday loans can pay them back.
  • Payday loan rates in states without laws vary from 391 to 521 percent.
  • According to the Pew Research Center, 55 percent of Americans reside in the 28 states where payday loan rules are laxer.
  • 58% of people who take out a payday loan have trouble affording their monthly bills.
  • When a prior payday loan is paid off, 80 percent of payday loans are taken out.
  • The same person often takes out loans.

Who Uses Payday Loans?

Over six percent of Americans have taken out a payday loan in the past five years, although certain groups are more inclined to do so than others.

Seventy-two percent of borrowers have a family income of less than $40,000 a year, and 52 percent are between the ages of 25 and 44. However, several socioeconomic elements might influence a person’s chance of taking out a payday loan.

  • Renters are 57% more likely than homeowners to take out payday loans.
  • With an annual family income of less than $40,000, those who take out a payday loan are 62% more likely to be in debt.
  • More than eight out of ten people who don’t attend college take out a payday loan.
  • African Americans take out payday loans at a rate 105 percent higher than other races and ethnicities.

What Is the Breakdown of Payday Loan Borrowers Based on Their Age?

Payday loan demographics are broken out per age group. People in their 20s most often take out payday loans.

Payday loan use by age group

  • just 5% of those aged 18-24
  • 9 percent of those aged 25 to 29
  • 30% to 34% 8%
  • 30% – 40% 7%
  • 7% of those ages 40-44
  • Seven percent of those ages 45 to 49 are in this bracket.
  • Fifty-four to five percent
  • 55% to 59.9%
  • 60-64% of those polled
  • 3 percent of those who are 65-69 years old
  • 70% + 2% = 70%

What Are the Racial and Ethnic Backgrounds of Payday Loan Borrowers?

Payday loan borrowers are divided into groups based on race and ethnicity. More African Americans than other races and ethnicities use payday loans regularly.

Race/ethnicity

How many people have taken out a payday loan?

  • Whites make up about 4% of the population.
  • 12% of the population is black.
  • 6% of the population is Hispanic or Latino.
  • Another ethnicity or racial group is 6%

Payday Loan Borrowers According to Where They Live?

A breakdown of payday loan borrowers based on where they live may be seen below. Payday loans are more common among renters than homeowners.

Percentage of households that have utilized a payday loan

  • Ten percent off for renters.
  • 4 percent of homeowners

What Is the Income Distribution of Payday Loan Users?

The following is a breakdown of payday loan demographics by income level. Individuals earning less than $40,000 a year are far more likely to take out payday loans than are those making more than that amount.

Percentage of people who have taken out a payday loan

  • 9 percent of those making less than $15k
  • 15% of those earning between $15k and $25k
  • 8 percent of those earning between $25k and $30k
  • Between $30k and $40k, 8% of the population
  • 5 percent of a salary between $40k and $50k
  • 4% of the $50k-$75k range
  • 3% of those earning $75,001 to $100,000 each year
  • At $100,000 and beyond, 1%

What Is the Educational Level of Payday Loan Users?

Payday loan demographics are broken down by education level. Payday loans are taken out more often by persons with little or no college education than by those with a four-year degree.

Percentage of borrowers with less than a high school diploma

  • Some of the students in high school are 7%
  • 6 percent of high school graduates
  • some universities are 7%
  • The percentage of people with a college degree is 3%.
  • Graduate degree or higher: 2% of the population

What Is the Marital Status of Payday Loans Users?

Payday loan borrowers, broken down by marital status, are shown in the graph below. They are more likely to take out payday loans if divorced or separated.

percentage of people who have utilized a payday loan while married

  • Seven percent of people in this country identify as single.
  • Having a roommate, 10% of the population
  • 5% of people are married.
  • Split or divorced 13% of the population.
  • Widows and widowers make up 4% of the population.

Who Uses Payday Loans Based on Their Parental Status?

Payday loan borrowers’ demographics are broken down in the following table based on their relationship with their parents. Parents are more likely than non-parents to take out payday loans.

Percentage of parents who have taken out a payday loan

  • Five percent of the population is not a parent
  • 8% of the time, it’s the parent.

Why Do People Use Payday Loans?

As a general rule, it’s best not to use payday loans for anything other than emergency or unexpected costs. A payday loan to pay for food or rent may seem like an excellent option to someone struggling to make ends meet. As a result, these loans are sometimes more expensive than the loan itself, putting debtors even further into debt.

Payday loans are used by 69% of borrowers to pay for standard costs.

The most prevalent uses of payday loans are to cover the costs of:

  • Utilities
  • Payment for a vehicle
  • Payment using a credit card.
  • Rent/mortgage
  • Food

What Are the Alternatives to Payday Loans?

Payday loans aren’t your only choice, even if you find yourself in a tight spot financially and want an immediate infusion of cash. Payday loans are notorious for kicking off a vicious cycle of debt, with borrowers sometimes finding themselves far over their heads in interest and other expenses. You might look at loans for poor credit borrowers, credit card cash advances, and individual installment loans as an alternative to taking out a payday loan.

There are fewer fees and a more extended payback period with these alternatives. Although credit card cash advances carry high APRs, the borrower has more time to pay them back.

Personal loan interest rates are restricted at roughly 36%, much lower than the 38% payday loan interest rate. The costs charged by personal-loan lenders are also lower than those charged by payday lenders.

If you’re considering getting a personal loan, make sure you shop around for the lowest rates and the best loans for those with terrible credit.

What Percentage of Payday Loans Are Repeaters?

Seventy-five percent of those who take out a payday loan have done so in the past. Only a few weeks after repaying a prior payday loan, 80 percent of all payday loans are taken out again. Seven out of ten payday loan users take out loans for recurrent needs, such as rent and other monthly obligations.

This kind of recurrent, long-term borrowing is not intended for payday loans. For example, if your vehicle breaks down and you need the money to repair it before your next payment, you should only utilize these loans.

Be sure that the financial product you’re asking for is best suited to your financial position before taking out any loan. You should also seek appropriate aid when suffering from your money for an extended time.

Why Are So Many Americans Using Payday Loans?

It is common knowledge that most payday loan borrowers misuse this form of borrowing. They either don’t know what they’re doing, or they don’t understand why they’re taking out this loan in the first place.

Not Taking the Appropriate Measures.

Borrowers aren’t taking the essential safeguards when using payday loans. An installment loan should only be considered if a regular source of income makes repayment possible. Payday loan borrowers make up more than half of them. Payday loans aren’t a good option if you’re not financially secure. Only 14 percent of payday loan consumers can afford to repay their debts.

Taking out a Loan for the Wrong Reasons

Payday loans may be pricey. Thus they should only be used in extreme cases. Millions of Americans are not taking advantage of payday loans as they were intended to be utilized — for short-term and unexpected expenditures. Emergency auto repairs and hospital or veterinary expenditures are situations when a payday loan could be appropriate. However, 70% of people who take out payday loans do so for routine, ongoing costs like rent and utility bills rather than unexpected ones like car repairs or a medical emergency. Payday loans may also be used to pay off other debts, which is something that should never be done.

What Is the Impact?

Payday loans have a wide-reaching effect on the American economy. Because of the hefty costs, a payday loan may only temporarily alleviate financial problems. After taking out a payday loan, you may be in a debt cycle. People who have utilized payday loans account for three-quarters of all borrowers. In addition, 80 percent of Americans take out a new payday loan within two weeks after paying off an old one.

Luke Pitt