Generally, payday loans are advertised as quick fixes for unexpected expenses — a couple hundred dollars to hold borrowers over until their next paycheck. But a new report from The Pew Charitable Trusts released Wednesday found the average borrower ends up in debt for five months, paying $520 in finance charges for loans of just $375.
Some borrowers spend years in debt.
Evelyn Hatchett is a retired garbage worker in Houston. In 2006, she fell behind on basic bills, including her electricity and some car repairs. She was tempted by payday loans, thinking they would help her catch up financially.
But sister advised her to steer clear.
“Because she got caught up years ago,” says Hatchett. “But I said, ‘Oh no, they going to loan me this money. I’m going to get it, because it was good at the time.’”
The process seemed simple enough: she’d get $350 and pay back $425 in a couple of weeks. But when she couldn’t repay the loan all at once, she started paying just the finance charges. Then she got a new loan to pay off the old one.
Hatchett estimates she’s borrowed about $2,000 from payday lenders over the years, plus a separate $1,500 she borrowed against her car. By now, she thinks she’s paid back three to four times the original value of her loans.
“I would go to one company and then I’d go to another,” she says. “I had like five loans out at one time because that’s how desperate I needed the money.”
Pew’s study found nearly 40 percent of payday borrowers would have taken out a loan no matter what the terms were.
Moreover, consumers have complicated relationships with these lenders, according to Nick Bourke, the director of Pew’s Safe Small Dollar Loans Research Project.
“They’re often talking to people behind the counter who do remember their names,” he says. “[Store employees] look [consumers] in the eye and they smile. They’re nice to them and they hand them money when they’re in a difficult situation.”
Like scratching an itch, the loans feel good for just a minute. Borrowers say they’re grateful for the money.
But they also report feeling taken advantage of and nearly three out of four respondents said they want more regulations on payday lenders.
Evelyn Hatchett is one of those consumers who hopes the rules surrounding these loans will change. She’s still paying down her debt — currently about $700 across two loans.
We’re here to help you navigate this changed world and economy.
Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.
In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.
Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.