Who Applies For Payday Loans?
With so much press about high risk payday loans being a form of subprime lending, or articles saying that payday lenders are targeting the poor and elderly, you might get the wrong idea about payday loan consumers. They’re not necessarily old, poor, or uneducated. Many are hard-working middle-class Americans who simply struggle sometimes living paycheck to paycheck.
After the credit crunch zapped most borrowers in the midst of the worst recession we’ve seen in almost a century, the reality is that people make use of credit when and where they can find it. Using credit has become standard in our society as a way of getting ahead. Overusing credit, however, has also become standard for too many of us, who break out the plastic to buy things we simply can’t afford, hoping that we’ll be able to keep up by making minimum payments.
As PersonalMoneyStore.com recently shared on its website, the average payday loan customer might surprise you. Their average customer was stable, having lived at the same address for three years and worked at the same company for six, they were in their mid- to late-thirties, and many of them were homeowners.
So where does all this concern over consumer protection come from? The main problem with $1.500 payday loans is the high interest rates they charge. When viewed over the course of a year, interest rates are typically 300% or more. That means a payday loan will cost you three times the amount you borrow – if you borrowed that amount for a year.
Payday loans don’t operate that way, though. They typically have to be repaid on the customer’s next payday, which causes people to think differently about interest rates. Customers don’t look at interest from an Annual Percentage Rate (APR) perspective, but tend to think in terms of X number of dollars per hundred borrowed instead. Since the loans are small, the actual amount of interest being paid also looks small, that is if the borrower pays the interest only once.
That isn’t the way it usually works out, though. It’s far more typical for customers to roll over their payday loan at least once, and it’s typically a lot more than that. In fact, the average customer rolls over their short-term loan around 10 times before it’s paid in full. Do they know this in advance? It’s hard to say.
Many consumer advocates as well as those in the government are concerned about payday lenders draining American’s wallets for what is assumed to be a short-term loan product. Although the terms are clearly spelled out, and most customers spend a good amount of time reviewing the information, customers are still out plenty of money for payday loans that drag out over months. To relieve this problem and give consumers protection, many states have enacted payday lending laws that help those in debt. To learn more about the payday lending laws in your state, visit this state-by-state guide.