As economic strain continues to plague the US, more people are turning to risky high cost 'payday loans' to pay for basic necessities such as food and rent, according to a recent study by Pew Center on the State.
Payday loans are short term high interest loans sold to consumers who may not typically qualify for lower interest long term loans from banks. The loans are advertised to cover unexpected costs such as a car repair to bide time until the following payday, hence the name.
However, according to the PEW study, now 7 in 10 people who use these high-fee loans are now using them more frequently and for everyday expenses, sinking further in debt just to meet day to day needs. Borrowers are usually low income individuals who are struggling to make ends meet from paycheck to paycheck.
The Pew report shows that now the average borrower may take out eight loans a year of up to $375 each and spend $520 in interest. The loans typically hold and APR of up to 400 percent.
“It’s not because of some unusual need that people are turning to payday loans. It’s because of some regular need,” said Nick Bourke of PEW. “People are paying a lot more in payday loan costs and fees than they anticipate going in,” Bourke said.
Each year, 12 million borrowers spend approximately $7.4 billion on payday loans.
"The payday loan industry is selling a product that few people use as designed and that imposes debt that is consistently more costly and longer lasting than advertised," the report concludes. "This circumstance is especially troubling because the conventional payday loan business model fundamentally relies on repeat usage—often, renewals by borrowers who are unable to repay the full loan amount upon their next payday—for its profitability."
"These findings raise serious concerns about payday lending, including whether a two-week product with an APR typically around 400 percent is a viable solution for people dealing with a chronic cash shortage."