Payday Lending in America

FDIC Advisory Committee on Economic In

April 24, 2014Nick Bourke, Project Director

www.pewtrusts.org/small‐loans 
Pew’s Small‐Dollar Loans Research

www.pewtrusts.org/small-loans 

• Payday Lending in America series (3 reports)

• Research began in 2011

– Unique, nationally representative

survey of payday borrowers

– Administrative data reviews

– Focus groups and interviews

www.pewtrusts.org/small‐loans
How Payday Loans Work

• Packaged as “short‐term” loan for “temporary need

– Obtained from storefronts, online, some banks (“deposit a

• Little to no underwriting

– Borrower has an income source and checking account

• Lender can debit bank account to collect (deferred p

• Short repayment period, tied to borrower pay cycle

– If borrower cannot pay in full, pays fee to renew, or borrow

• Avg. loan is $375

– Fee per 2 wks: $55 store, $95 online, $35 bank

www.pewtrusts.org/small-loans 
Who Uses Payday Loans?

www.pewtrusts.org/small-loans 

For msee Perepor
Profile of Payday Borrowers

www.pewtrusts.org/small-loans 

• 12 million users per year, spending about $7.4 billio• Have a checking account  These are bank customers• Have income – about $30,000 per year

• “Thick File” credit histories

– More than 90% have a credit score – low 500s

– Most have credit cards – usually maxed out
Most Use Payday Loans for Monthly Bills

www.pewtrusts.org/small-loans 
A Core Problem:

— Payday Loans Are Fundamentally Unaffordable

• Typical payday loan takes 36% of borrower’s pretax 

– Far too much – undermines ability to meet other financia

without borrowing again.

• But what percentage would be more reasonable?• Most borrowers cannot afford to pay more than

5% of their pretax paycheck

– As shown by national survey data, underwritten installme

markets, conventional payday loan fee amount, CO case s

www.pewtrusts.org/small-loans 
Renewing is Affordable, But Paying Off is Not

www.pewtrusts.org/small-loans 
When Loans Exceed Borrower Capacity,

Extended Usage is the Norm

• Average borrower in debt for 5 months of the year

– Even though many sought to avoid “debt” or “another bil

• Average borrower pays $520 per year

– Even though many responded to the “fixed fee” propositi

• Borrowers report that paying bills is harder

– Even though most took a loan to get help paying bills

www.pewtrusts.org/small-loans 
Volume / Renewal is Not a Good Measure of “Need”

• Nearly all loans go to repeat borrowers

– 97% of loans go to those using 3+ per year; 63% to those us

• Consecutive usage is the norm

– 80% of loans originate w/in 14 days of a previous loan

– Half of all loans occur within a sequence lasting 10+ loans

• Counting number / size of loans overinflates “need” e

– Infrequent borrowers account for negligible volume/revenu

– Frequent / long‐term use is driven by unaffordable nature o

coupled with lender ability to collateralize borrower’s incom

Sources: Analysis of state regulatory data; CFPB; Stephens Inc.

www.pewtrusts.org/small-loans 
www.pewtrusts.org/small-loans 

Selected Other Findings, Briefly Noted
Other Key Takeaways:

Pew’s Payday Lending In America Series

• Borrowers have other options

– Cut expenses, borrow from family/friends, sell/pawn items

• Choice to use payday loans is driven by unrealistic

expectations, and desperation

• To eventually pay off, 41% needed a cash infusion

– Borrow from friends/family, sell/pawn, other loans, tax refu

• Restrictive state laws not driving people online

– Online usage rates same everywhere, even where there are 

www.pewtrusts.org/small-loans 
Payday Loans Do Not Eliminate Overdraft Risk

www.pewtrusts.org/small-loans Report: 

See p.32-35
Deposit Advance Loans

Did Not Eliminate Overdraft Risk

www.pewtrusts.org/small-loans CFPB 

Data
Borrowers Have Torn Feelings

• Grateful to receive cash• Friendly customer service from local stores• But 58% feel the product takes advantage of them

www.pewtrusts.org/small-loans 
www.pewtrusts.org/small-loans 
Borrowers Overwhelmingly Support

Requiring Installment Payment Structure

Smaller

Payments

Amortize Smaller

Payments

More

Time

S

Pa

Inst
www.pewtrusts.org/small

Project Director:Nick Bourke202.552.2123nbourke@pewtrusts.org

Government Relations:

Steve Abbott202.540.6647sabbott@pewtrusts.org

Research:

Alex Horow202.540.631ahorowitz@
www.pewtrusts.org/small-loans 

Postscript
www.pewtrusts.org/small‐loans 

A Market Lacking Price Competition

How much does a $500 payday loan cost?

AdvanceAmerica

Ace CashExpress

Check into

Cash

Check n Go

Florida $55 $55 $53 $55

Michigan $65.45 ‐‐‐ $65.45 $65.45Kansas $75 $75 $75 $75Nevada $92.50 $85 $110 $125Alabama $87.50 $87.50 $87.50 $87.50

Costs listed on company websites as of November 1, 2013
www.pewtrusts.org/small‐loans 

A Market Lacking Price Competition

State grouping Average cost to borrow $300 for 5 months Median 

100,000 

Lower than average rate cap $281 3

Average rate cap $435 7

Higher than average rate cap $528 1

No rate cap $604 1