People have always used payday loans for emergency situations, but these days an emergency may require more than a quick fix. MSNBC reports that almost seven in 10 people are using these short-term, high fee loans for everyday expenses such as food, rent and utilities. As a result, the popularity of payday loans appears to be on the rise.
The findings were published in a recently released report by Pew Center on the States. According to the report, payday loans are usually loans of $100 to $500. Lenders charge about $15 for each $100 borrowed over a two-week period.
“Of course there’s recurring use for this product,” Amy Cantu, spokeswoman for the Community Financial Services Association of America, a trade group for payday lenders, said to MSNBC. “It’s often the best option for millions of Americans that are looking to manage their financial obligations.”
The high fee rates of payday loans combined with their use for everyday needs transforms the loan into a high-interest credit line that leaves users in debt for months. The average user takes out $375 a year and spends $520 in interest. Although over half of payday users are white, females between 25 and 44 years old, African Americans are more likely to use payday loans than any other minority group. Most people that use payday loans don’t have a four-year college degree. In addition, parents are more likely to use payday loans, especially if the household income is less than $50,000 a year.
In the past five years, about 5.5 percent of American adults have used payday loans, and in 2010 12 million people used them.
Despite what the lenders may say, Pat Seamon, the senior director with the National Endowment for Financial Education, says that payday loans are one of the most expensive ways to borrow money. She advises that low-income families should avoid them at all cost, and instead create an emergency fund of as little $500. Although this is much less than the recommended six to nine months recommended by most financial specialists, she believes it’s an approachable goal for these families and a better system than payday loans.