If you ask a payday loan employee about the service its company provides, the answer is: “A viable alternative for unexpected financial emergencies.” Although a credit union professional might call payday lending legal loan sharking, a payday loan customer offers a different answer: A payday loan is a fast, convenient and very expensive answer to a need.
Payday Lending - At a Glance
- The payday loan industry's loan volume has more than doubled over the last six years and grosses $40 billion per year
- Payday loan outlet locations exceed 22,000
- American families pay $4.2 billion per year in excessive payday loan fees
- 91% of payday revenue comes from borrowers with five or more loan transactions per year
- The typical payday borrower pays back $793 for a $325 loan
What Is a Typical Payday Loan?
The typical payday loan amount is $300 per two-week period. An average fee of $15 for each $100 is charged, resulting in a 390% APR. The fees can exceed 800% APR depending on the number of times the customer renews the loan for a larger fee.
Payday loan growth has exploded over the last six years, outlets in the U. S. almost twice the number of McDonald’s locations. Although a payday loan is structured as a one-time alternative for an emergency, its business model is dependent upon “loan flipping” or rollovers. This is a process by which payday borrowers renew their short-term loan for a larger fee because they are unable to pay the original fee on the due date. Loan flipping can result in APRs ranging from 300% to over 800%. Research shows that only 1% of payday borrowers take out one loan per year and pay it off on the original due date, which is its intended purpose.
Who Is the Payday Loan Customer?
- Average income: $30-45,000
- Average age: 34
- Over 30% own a home
- Average FICO: 560
- Average Loan: $300
- Number of loans per year: 4
Despite legislative reform efforts and controversial debates about lending abuse, payday lending continues to grow at a solid pace. It is fulfilling a need for many U.S. consumers, including credit union members. So credit unions across the nation are increasingly offering products that provide member-friendly alternatives. Join us for the upcoming webinar, Meeting Members' Short-Term Loan Needs: Alternatives to Payday Lending, and hear from credit unions who are offering short-term loan programs.
Sources: Center for Responsible Lending, November 30, 2006, “Financial Quicksand: Payday Lending Sinks Borrowers In Debt With $4.2 Billion In Predatory Fees Every Year”, Mister Money Holding, Inc., 2005