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Payday Lending in America: Who Borrows, Where They Borrow, and Why

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Payday Lending in America: Who Borrows, Where They Borrow, and Why PAYDAY LENDING IN AMERICA: Who Borrows, Where They Borrow, and Why This report series, Payday Lending in America, presents original research findings from the Pew Safe Small-Dollar Loans Research Project on how to create a safe and transparent marketplace for those who borrow small sums of money. www.pewtrusts.org/small-loans THE PEW CHARITABLE TRUSTS SAFE SMALL-DOLLAR LOANS RESEARCH PROJECT JULY 2012 The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public, and stimulate civic life. The Safe Small-Dollar Loans Research Project focuses on small-dollar credit products such as payday and automobile title loans, as well as emerging alternatives. The project works to find safe and transparent solutions to meet consumers’ immediate financial needs. PEW CHARITABLE TRUSTS Susan K. Urahn, managing director Research and Writing Publications and Web Nick Bourke Jennifer Peltak Alex Horowitz Mark Pinkston Tara Roche Evan Potler Carla Uriona ACKNOWLEDGEMENTS We would like to thank Shelley Hearne, Steven Abbott, Eleanor Blume, Jeff Chapman, Jennifer V. Doctors, Laura Fahey, Amy Gershkoff, Nicolle Grayson, Andrea Hewitt, Scott Keeter, Samantha Lasky, Barclay Mitchell, Liz Voyles, and Robert Zahradnik for providing valuable input and feedback on the report. We also would like to thank the small-loan borrowers who participated in our survey and focus groups, and the many people who helped us put those groups together. The report benefited from the insights and expertise of an external reviewer, Alan M. White, professor of law at Valparaiso University. Additionally, survey research expert Mike Mokrzycki provided us with valuable feedback in designing our survey and methodology. Although they have reviewed the report, neither they nor their organizations necessarily endorse its findings or conclusions. For additional information, visit www.pewtrusts.org/small-loans This report is intended for educational and informational purposes. References to specific policy makers or companies have been included solely to advance these purposes and do not constitute an endorsement, sponsorship, or recommendation by The Pew Charitable Trusts. ©2012 The Pew Charitable Trusts. All Rights Reserved. 901 E Street NW, 10th Floor 2005 Market Street, Suite 1700 Washington, DC 20004 Philadelphia, PA 19103 Contents Executive Summary ..................................... 2 Key Findings........................................... 4 Introduction ........................................... 6 1. Who Uses Payday Loans?............................... 8 Exhibit 1: Payday Loan Usage by Demographic ............................10 Exhibit 2: Payday Loan Borrowing More Common in Cities ...................12 Exhibit 3: Payday Loan Usage by Geographic Grouping......................12 2. Why Do Borrowers Use Payday Loans? ................... 13 Exhibit 4: Most Borrowers Use Payday Loans for Recurring Expenses ...........14 3. What Would Borrowers Do Without Payday Loans? ......... 16 Exhibit 5: Alternatives if Payday Loans Were Unavailable .....................16 4. Does Payday Lending Regulation Affect Usage?............ 19 Exhibit 6: How States Regulate Payday Lending ............................21 Exhibit 7: In Restrictive States, 95 of 100 Choose Not to Borrow ...............22 Exhibit 8: Number of Borrowers per 10,000 Population ......................23 Exhibit 9: Method of Acquiring Payday Loans by State Law Type ..............23 Exhibit 10: Payday Loan Storefronts......................................24 Exhibit 11: State Laws Are Not Driving Payday Loan Complaints ...............25 Exhibit 12: How People Obtain Payday Loans..............................27 Exhibit 13: Method of Acquiring Payday Loans by Borrower Demographic Group . 28 Conclusion ........................................... 29 Methodology: Opinion Research .......................... 31 Appendix A .......................................... 35 Exhibit 14: Payday Loan Borrower Demographic Snapshot....................35 Appendix B........................................... 36 Exhibit 15: Logistic Regression Analysis of Likelihood of Payday Loan Usage by Select Demographics...............................................37 Endnotes ............................................ 38 WWW.PEWTRUSTS.ORG/SMALL-LOANS 1 Executive Summary Payday loan borrowers spend Comptroller of the Currency (OCC), approximately $7.4 billion1 annually and Federal Trade Commission (FTC), at 20,000 storefronts and hundreds also will have important roles to play as of websites, plus additional sums at a banks and online providers continue to growing number of banks. The loans enter the payday loan field.3 are a highly controversial form of credit, as borrowers find fast relief but often Existing data show that, in at least two struggle for months to repay obligations significant respects, the payday lending marketed as lasting only weeks.2 While market does not function as advertised. proponents argue that payday lending is First, payday loans are sold as two- a vital way to help underserved people week credit products that provide solve temporary cash-flow problems, fast cash, but borrowers actually are opponents claim that the practice preys indebted for an average of five months on overburdened people with expensive per year. Second, despite its promise of debt that is usually impossible to retire “short-term” credit, the conventional on the borrower’s next payday. payday loan business model requires heavy usage to be profitable—often, Many state officials have acted to curb renewals by borrowers who are unable payday lending. However, there has to repay upon their next payday. These been little opportunity for federal discrepancies raise serious concerns policy on payday lending until now. about the current market’s ability to Resolving the debate over the ways in provide clear information that enables which payday loans and lender practices consumers to make informed decisions. may help or harm borrowers will fall to the Consumer Financial Protection This report, Who Borrows, Where They Bureau (CFPB), which Congress recently Borrow, and Why, is the first in Pew’s created and charged with regulating Payday Lending in America series. The payday lending. Other federal agencies, findings provide policy makers with such as the Federal Deposit Insurance research to address concerns about small- Corporation (FDIC), Office of the dollar loans and to promote a safe and WWW.PEWTRUSTS.ORG/SMALL-LOANS 2 EXECUTIVE SUMMARY transparent marketplace. In addition to demographically? How many people are discussing Pew’s focus groups, the report borrowing? How much do they spend? presents selected results from a first-ever Why do they use payday loans? What nationally representative telephone survey other options do they have? And do state of payday borrowers. The report answers regulations reduce payday borrowing or six major questions: Who are borrowers, simply drive borrowers online instead? WWW.PEWTRUSTS.ORG/SMALL-LOANS 3 Key Findings 1 Who Uses Payday Loans? Twelve that, while lower income is associated million American adults use payday with a higher likelihood of payday loan loans annually. On average, a borrower usage, other factors can be more predictive takes out eight loans of $375 each per of payday borrowing than income. For year and spends $520 on interest. example, low-income homeowners are less prone to usage than higher-income Pew’s survey found 5.5 percent of adults renters: 8 percent of renters earning $40,000 nationwide have used a payday loan in to $100,000 have used payday loans, the past five years, with three-quarters of compared with 6 percent of homeowners borrowers using storefront lenders and earning $15,000 up to $40,000. almost one-quarter borrowing online. State regulatory data show that borrowers take 2 Why Do Borrowers Use Payday out eight payday loans a year, spending Loans? Most borrowers use payday about $520 on interest with an average loans to cover ordinary living expenses loan size of $375. Overall, 12 million over the course of months, not Americans used a storefront or online unexpected emergencies over the payday loan in 2010, the most recent year course of weeks. The average for which substantial data are available. borrower is indebted about five months of the year. Most payday loan borrowers are white, female, and are 25 to 44 years old. However, Payday loans are often characterized after controlling for other characteristics, as short-term solutions for unexpected there are five groups that have higher expenses, like a car repair or emergency odds of having used a payday loan: those medical need. However, an average without a four-year college degree; home borrower uses eight loans lasting 18 days renters; African Americans; those earning each, and thus has a payday loan out for below $40,000 annually; and those who five months of the year. Moreover, survey are separated or divorced. It is notable respondents from across the demographic WWW.PEWTRUSTS.ORG/SMALL-LOANS 4 KEY FINDINGS spectrum clearly indicate that they are 4 Does Payday Lending Regulation using the loans to deal with regular, Affect Usage? In states that enact ongoing living expenses. The first time strong legal protections, the result is a people took out a payday loan: large net decrease in payday loan n 69 percent used it to cover a usage; borrowers are not driven to recurring expense, such as utilities, seek
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