Despite their allure, payday loans don't bring the benefits cash-strapped workers are hoping for, new research shows.
The study from the Pew Charitable Trusts revealed that most borrowers cannot afford to pay off the loans in 2 weeks, the typical duration of most payday loans; those borrowers then end up in long-term debt.
The research shows that when the time comes to pay off the loan, the average borrower can only afford to pay $50 of the total loan repayment, which averages $400. Previous Pew research shows Americans spend $7.4 billion per year on the loans, including an average of $520 in interest for each borrower who ends up indebted for 5 months of the year.
"Payday loans are marketed as an appealing, short-term option, but that does not reflect reality," said Nick Bourke, Pew's expert on small-dollar loans. "The loans initially provide relief, but they become a hardship."
Despite the one-time infusion of cash the loans provide, the majority of those who take out such loans deal with persistent cash shortfalls rather than temporary emergencies. Nearly 60 percent of payday loan borrowers have trouble meeting monthly expenses at least half the time. In addition, just 14 percent can afford to repay an average payday loan out of their monthly budgets.
In the end, the study revealed, this debt forces many borrowers turn to the same options they could have used instead of payday loans in the first place. More than 40 percent of borrowers use another source in order to pay off their payday loans, such as getting help from friends or family, selling or pawning personal possessions, taking out another type of loan or using a tax refund.
Borrowers reported feeling conflicted about their experiences, with the majority of those surveyed saying the loans both take advantage of them and provide relief. But borrowers do want to change how payday loans work. The research found that by almost a three-to-one margin, borrowers favor more regulation of payday loans.
The study was based in part on more than 700 interviews with payday loan borrowers.