Study finds payday loan hard to pay off on time

— Cash-strapped consumers who turn to payday loans to solve short-term financial needs frequently have little realistic chance of paying them off on time, according to a new study.

A report issued last week by the nonprofit Pew Charitable Trusts found that just 14 percent of borrowers nationwide can afford to pay off the average payday loan when it comes due. Consequently, most borrowers end up renewing their loans or, alternatively, paying them off and then quickly taking out new ones.

“Payday loans are unaffordable,” Nick Bourke, director of Pew’s Safe Small-Dollar Loans Research Project, said on a conference call Wednesday. “Renewing a payday loan is affordable and paying it back is not.”

The new Pew report surveyed 703 borrowers of payday loans nationwide, supplemented by eight focus group sessions conducted with borrowers in four cities. It’s a follow-up to a report the group issued last year that found, among other things, that 69 percent of first-time borrowers use payday loans for everyday bills rather than unexpected expenses.

Bourke said that the average loan is for $375 and carries an average fee of $55. So paying back the average loan in full would require $430 when the borrower receives his next paycheck, typically two weeks later.

But the survey found that the average borrower can afford to pay just $50 in two weeks, which is barely enough to pay the fee while only 14 percent can afford to pay more than $400.

A payday industry trade group, the Community Financial Services Association of America, issued a statement that dismissed the report.

“Pew’s research in this area continues to lack vital context about the broader marketplace and the lack of available credit options, the importance of consumer choice, and why 19 million Americans use payday loans each year,” the association said.

“Short-term credit products are an important financial tool for individuals who need funds to pay for an unexpected expense or manage a shortfall between paychecks,” the association continued.

“Borrowers who choose to use payday loans may do so to avoid bouncing checks, paying overdraft protection fees, incurring late payment penalties,or turning to other credit options that can actually be more expensive than CFSA-member loans. The typical fee charged by CFSA members is $15 per $100 borrowed.”

“They make such broad conclusions based on a relatively small sample size,” said Jamie Fulmer, a spokesman for Advance America, one of the nation’s largest payday lenders. “Overwhelmingly, the customers who use our product, they use the product responsibly and to their satisfaction.”

Other findings in the Pew report included that four in five borrowers take out three or more payday loans per year and the average payday borrower owes money on a payday loan for five months during the year. The report also found that many borrowers who choose a payday loan over alternatives such as selling or pawning their possessions or borrowing money from family members or friends end up ultimately taking such steps anyway in order to pay off the loans.

The study also indicated that borrowers are conflicted about payday loans. While a majority said the loans take advantage of them, yet a majority also said they would use payday loans again.

Business, Pages 73 on 02/24/2013

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