As big commercial banks have tightened lending requirements and credit standards in recent years, credit sources outside of the traditional finance industry have grown immensely. Individuals who need cash on a short term basis are increasingly turning away from their banks and toward different sources to meet their immediate financial needs. Among the most recognized and commercially popular of these sources is the payday lending industry. Tens of thousands of payday loan storefronts and dozens of websites have sprung up as lenders meet the demand of consumers looking for short term credit.
Payday lenders specialize in short term loans at or under roughly $500. They are designed to tide an individual’s cash needs over until their next paycheck. As such, most payday loans have a term structure of two weeks, with the repayment date coinciding with the day the borrower receives his or her paycheck. On the day of repayment, the borrower pays back the principal of the loan plus a fee that serves as the lender’s interest. It is usually expressed in dollar terms instead of a traditional interest rate. That is, a payday loan provider might charge a flat $10 to $20 for every $100 borrowed over the two week term. As it is still fairly new, the payday loan industry is largely subject only to regulations at the state level.
Though the effective interest rates are relatively high compared to standards in the traditional finance industry, many find that the relaxed credit standards and availability of payday loans are the best or only option. These people have fueled the rise of the payday loan industry, making it a very large and very profitable business.
Research conducted by the Pew Charitable Trust in 2012 revealed just how big the United States payday loan industry has become. That year, $7.4 billion was spent on short term credit from payday lenders. The same study found that 5.5% of all adults in America have taken out a payday loan. The demographic characteristics of the borrowers represent a wide swath of the population. Borrowers are nearly evenly split between men and women, representing 48% and 52% of the total respectively. Caucasians represent 55% of those who have used payday loans.
Though it is not seen by regulatory agencies like the Consumer Financial Protection Bureau as particularly favorable, the payday lending industry does seem to meet legitimate consumer needs. In the Pew Charitable Trust study, a survey of individuals who have taken out payday loans showed that short term credit was a buffer before more dire options would need to be explored. Respondents at large said that without payday loans, they would put off paying bills, ask family and friends for money, or begin disposing of their assets to meet their immediate needs for liquidity. As long a segment of the population remains under banked and in need of credit, the payday lending industry will likely remain a viable option.