Payday Loans: Who Uses Them In The USA And Why?

Payday Loan

What Is a Payday Loan Exactly?

Payday loans are short-term monetary aid that typically advances only a few hundred dollars. The average person needs a loan of $500 per month to pay for necessities like rent, utilities, food, and healthcare. Even though the name “payday loans” suggests that the loans are tied to a borrower’s income, lenders may still provide such loans if they are confident that they will be repaid quickly.

Most payday loan companies, such as DimeBucks, are concentrated in areas of the United States with low average household incomes. Their customers have low credit scores and no other resources to fall back on in the event of unexpected costs.

Even though payday loan default rates are typically low, there is a widespread misconception that payday lenders must charge high-interest rates because they deal with high-risk borrowers. Many states now regulate payday loan interest rates; as a result, many lenders have left unregulated states in search of other markets.

How many people in the United States use payday loans?

Payday loans are used by 12 million Americans each year. Payday loans have been used by approximately 6% of adults in the United States in the last five years, and this trend is expected to continue. Payday loan fees cost the economy $9 billion each year.

Payday loans allow Americans to borrow money against their next paycheck. There will be approximately 23,000 payday lenders in the United States by 2020. Payday loans have grown in popularity over the last decade.

So, why do so many Americans use payday loans? And what is the ramification of this? Looks into it.

What Are the Steps to Obtaining a Payday Loan from DimeBucks?

It can be deceivingly easy to get a payday loan. When you buy something, you must show your pay stub, a valid form of identification, your driver’s license, and a blank check from your checkbook. The stores are often used as pawn shops. The clerk will give you a small loan, usually between $100 and $500, that you will have to pay back when you get paid again. You will agree to pay an amount that seems fair, like $15 for every $100 you borrow.

The lender will require a postdated check in the amount of the loan plus any fees, which will be cashed after the loan period, typically two weeks. They may occasionally request permission to withdraw funds electronically from your bank account. When the due date arrives, cash-strapped individuals realize they need every dollar from their next paycheck to cover their living expenses, so they contact the lender and request an extension. This can add up quickly.

The Truth in Lending Act applies to payday lenders. It mandates that lenders disclose the cost of the loan. Before you sign for a payday loan, the finance charge and annual percentage rate (APR) must be informed in writing.

Even though most payday lenders operate out of physical locations, a newer type of loan provider operates online. Some are direct loan providers, while others are information brokers who collect and sell data to lenders. According to financial experts, online lenders can be risky. They may offer you a loan, but you cannot know if they will use your personal information for other purposes, opening the door to scammers. Numerous websites are information brokers that collect and sell your financial information to lenders.

Who uses payday loans in America?

Approximately 6% of Americans obtained payday loans within the past five years, but certain demographics are more likely than others to have done so.

72% of borrowers earn less than $40,000 annually, and 52% are between the ages of 25 and 44. The likelihood of obtaining a payday loan is, however, influenced by several demographic factors, including:

57% more often than homeowners, renters utilize payday loans

Those with household incomes less than $40,000 are 62% more likely to obtain payday loans.

Those without a college degree are 82% more likely than those with a college degree to obtain payday loans.

African Americans are 105% more likely to take out a payday loan than individuals of other races or ethnicities.

What motivates individuals to obtain payday loans?

Payday loans are for sudden or emergency costs, so it’s best not to use them for anything else if you can help. If you live paycheck to paycheck and are falling behind on your bills, it may seem like a good idea to get a payday loan to pay for groceries or rent. Most of the time, the fees that come with these loans are more than the loans themselves. This makes it harder for people to get out of debt.

Nevertheless, 69 percent of payday loan borrowers utilize these loans for everyday expenses.

Frequently, payday loans are used to cover the following costs:

  • Utilities
  • The cost of a car
  • Credit card for payment
  • Rent/mortgage
  • Food

Why Cash Advances Are A Poor Investment?

Individuals most susceptible to payday lenders are frequently underbanked or lack accounts with major financial institutions, forcing them to rely on services such as payday lending to establish credit. The extremely predatory nature of the industry’s astronomical interest rates, which average at least 300 percent or more. 

People use payday loans to cover recurring expenses instead of unforeseen or emergency expenses. These ongoing costs for Millennials and Generation Z, born between 1981 and 1996, include student loan payments and daily transportation costs. According to a 2012 study by Pew Charitable Trusts, the vast majority of payday loan borrowers, 69 percent, initially used payday loans for recurring expenses, while only 16 percent used payday loans for unexpected expenses. Even though studies have shown that payday loans were neither intended for nor effective at assisting with the payment of recurring costs, the average borrower is in debt for five months per year due to eight 18-day loans. Finally, payday loans cost Americans over $4 billion annually in fees, and the payday lending industry costs the United States $7 billion annually for 12 million borrowers.

This blatantly exploitative industry can only survive because it continues to exploit Washington’s corrupt culture, which benefits special interests at the expense of average Americans. Due to the Trump administration’s loosening of industry regulations, payday lenders now have the green light to exploit borrowers and set their sights on a new target: young people in debt.

Why do Payday lenders target young borrowers?

Today’s youth are more financially insecure than any previous generation. The student loan debt crisis is a major contributor to young people’s financial difficulties. Between 1998 and 2016, the number of households with student loan debt doubled. Student loans are the most common source of debt for members of Generation Z, accounting for roughly one-third of all adults aged 25 to 34. Even though many members of Generation Z are not yet of the age to attend college and incur student loan debt, they are concerned about the future costs of higher education. 

According to a recent Northwestern Mutual study, Millennials have an average debt of $27,900, while Generation Z has an average debt of $14,700. Young workers with debt and a bachelor’s degree today earn the same as workers without a bachelor’s degree did in 1989, and Millennials earn 43% less than Gen Xers did in 1995.

College graduates with student loan debt have negative net worth for the first time in history. Millennials have half the net worth of Baby Boomers at the same age. These statistics are even worse for young African American Millennials: Homeownership, median net worth, and the percentage of this cohort saving for retirement all fell between 2013 and 2016. These factors, combined with the fact that 61 percent of Millennials, compared to 52 percent of the general population, are unable to pay their expenses for three months, demonstrate the prevalence of financial insecurity among young adults. This percentage rises for people of color, with 66% of 

Latinx young adults and 73% of Black young adults are cannot cover three months’ expenses. This is especially concerning given that Millennials and Generation Z are the most diverse generations in U.S. history, with young people of color constituting the majority of both groups.

Payday loans are used for what purposes?

Surprisingly, most payday loan borrowers (69%) use the funds to pay for recurring expenses such as credit card bills, rent, and food. This demonstrates that most payday loan borrowers are constantly short on cash and in need of additional income.

Although many payday loan companies market their loans as a quick fix for unexpected expenses, only 16% of payday loan borrowers use the funds for this purpose.

Borrowers’ expense type quotient 69% of all recurring expenses 16% of unanticipated emergencies Something distinctive 8%

Where Can People Get Payday Loans?

Most payday loan borrowers (73%) get their loans in-store. People in the South are more likely to obtain payday loans than people in other parts of the country. Residents of the Northeast are the least likely to get payday loans. Payday loans are most likely to be obtained by city dwellers.

How many payday loans are revolving?

75% of payday loan borrowers have used this type of credit in the past. Seven out of every ten payday loan users borrow for recurring expenses such as rent and other regular bills, accounting for an astounding 80 percent of payday loans.

Payday loans are not intended for such frequent, long-term use. These loans should only be used for one-time expenses, such as when your car breaks down, and you need it fixed before your next payday.

It is critical to ensure that the financial product you are applying for is best suited to your financial situation before taking out any type of loan and to seek appropriate assistance if you are experiencing long-term financial difficulties.

Why are so many Americans turning to payday loans?

The vast majority of payday loan borrowers use these loans incorrectly. They are either not taking the necessary precautions before choosing this loan or borrowing for the wrong reasons.

What Are the Consequences?

The consequences of so many Americans using payday loans are widespread. Because of the high fees, a payday loan may only provide a temporary solution to financial problems, with the problems reappearing later. The most serious economic ramifications of taking out a payday loan could be falling into a debt cycle. Borrowers with prior experience obtain three-quarters of payday loans. Furthermore, 80% of payday loans obtained by Americans are obtained within two weeks of repaying a previous payday loan.

If you’re unsure whether a payday loan is right for you, read our guide, Is A Payday Loan Right For Me?


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