The Payday Loan United States Industry and Its Impact

The payday loan industry in the United States has grown significantly over the years, with over 12 million borrowers taking out payday loans annually. This industry is worth billions of dollars, with some estimates suggesting it generates over $40 billion in revenue each year.

Payday lending is heavily concentrated in certain states, with some states having as many as 10 times more payday lenders per capita than others. This is largely due to the fact that some states have more lenient regulations regarding payday lending.

A significant number of payday loan borrowers are low-income individuals who struggle to make ends meet. In fact, a study found that 76% of payday loan borrowers have incomes below $40,000 per year.

Payday loans have a surprisingly long history in the United States, dating back to the early 20th century.

Prior to the 1990s, payday loan firms were extremely rare, but have since grown substantially. This growth was fueled by banking deregulation in the late 1980s, which caused small community banks to go out of business and created a void in the supply of short-term microcredit.

The industry sprang up to fill this void, offering microcredit to the working class at expensive rates. By the early 1990s, check cashers began offering payday loans in states with loose regulations, often listing themselves in yellow pages as "Check Cashers."

In the early 1900s, some lenders participated in salary purchases, a practice where they would buy a worker's next salary for an amount less than the salary, days before it was paid out.

These early salary purchases were essentially payday loans, but structured to avoid state usury laws.

They were a precursor to the modern payday loan industry, which would later become notorious for its high interest rates and fees.

Lenders would essentially buy a worker's future income, often with exorbitant interest rates, to make a quick profit.

In the 1930s, check cashers were already around, cashing post-dated checks for a daily fee until the check was negotiated at a later date.

Check cashers were essentially prepaid loan services, where customers paid a fee to cash a check that wouldn't be paid out until later.

By the early 1990s, check cashers began offering payday loans in states with loose regulations.

The 1990s marked a significant turning point in the history of payday loans. Banking deregulation in the late 1980s led to the demise of small community banks, creating a void in the supply of short-term microcredit.

This void was filled by the payday loan industry, which sprouted up to supply microcredit to the working class at expensive rates. The industry grew rapidly, with storefronts increasing from fewer than 500 to over 22,000.

Payday loan stores became a common sight across the country, outnumbering Starbucks shops and McDonald's fast food restaurants by 2008. The industry's total size reached $46 billion, and it has continued to rise since then.

The payday loan industry's growth was made possible by the efforts of business leaders like Allan Jones, who founded Check Into Cash in 1993. Jones's business model was made possible after he donated to the campaigns of legislators in multiple states, convincing them to legalize loans with high interest rates.

Payday loans are a type of short-term loan that can be obtained quickly, often with minimal requirements. You'll typically need an active bank account, a government-issued ID, and proof of income, such as a pay stub. Some lenders may also require a Social Security number.

Payday lenders will usually provide the loan amount in cash, by check, or by depositing it into your bank account. In exchange, you'll write a check for the loan amount plus the finance charge, which is based on your loan amount. The lender will then cash the check on the repayment date, usually within 14 days.

The loan is typically due on your next payday, which can be within two weeks or a month. If you can't afford to repay the loan, you may be able to renew it or roll it over into a new payday loan, but this can compound your finance charges and create a cycle of debt.

A loan is essentially borrowing money from a lender, with the promise to repay it, usually with some extra costs added on top. Payday loans, in particular, are a type of loan that's meant to be repaid with the borrower's next paycheck.

These loans are typically small, usually $500 or less, and are often made to people who have bad or nonexistent credit. Payday loans are usually short-term, with payments due within two weeks or close to the borrower's next payday.

High fees and interest rates are a hallmark of payday loans, with annual percentage rates (APRs) that can be triple-digit. Different states have different laws surrounding payday loans, limiting how much you can borrow or how much the lender can charge in interest and fees. Some states even prohibit payday loans altogether.

Payday loans are a type of short-term loan that can provide quick access to cash, but they come with high fees and interest rates.

To get a payday loan, you typically need to provide proof of identification, income, and a bank account. This is because payday lenders have few requirements for approval, and most don't run a credit check.

You can apply for a payday loan online or in-person at a physical store that offers check cashing and other services. Some payday lenders even offer cash loans at their stores, where you can receive the cash immediately.

Payday loans are unsecured, meaning you don't have to pledge any property to qualify. However, this also means that the lender can withdraw the loan amount from your bank account on the due date.

The loan is usually due on your next payday, typically within two weeks, but sometimes in one month. If you can't afford to repay the loan, you may be able to renew it or roll it over into a new payday loan, but this can compound your finance charges and create a cycle of debt.

Payday loans are not installment loans, which are repaid over time in smaller amounts. Instead, you'll need to repay the entire loan amount shortly after borrowing it.

Here's a breakdown of the typical process:

Keep in mind that payday loans are high-cost loans with triple-digit APRs, and you should only consider them as a last resort.

Payday lenders often compare their fees to the costs of other financial mishaps, like bounced checks or late credit card payments. This can make their loans seem more affordable.

A $100 payday advance with a $15 fee, for example, has an APR of 391%. But if you bounce a check, you'll pay $54 in NSF/merchant fees, which works out to a whopping 1,409% APR.

Payday lenders like to list alternative scenarios with costs expressed as APRs for two-week terms. This can be misleading, as these alternatives don't compound interest or have longer terms.

Here's a comparison of some of these alternative costs:

These comparisons can be eye-opening, but remember that payday loans are often the most expensive option.

The payday loan process is straightforward, but it's essential to understand what's involved. Typically, a lender provides a short-term unsecured loan to be repaid at the borrower's next payday.

Verification of employment or income is usually required, although some lenders don't verify income or run credit checks. You'll need to provide pay stubs, bank statements, and a government-issued ID to qualify for a payday loan.

To get a payday loan, you'll need to meet the lender's requirements, which are relatively few. Most payday lenders don't run a credit check or require that you have the means to repay the loan.

You'll typically need a photo ID, a bank account in relatively good standing, and a steady paycheck to qualify for a payday loan. Some lenders may also require a Social Security number.

The loan repayment process varies depending on whether you borrow from a storefront lender or an online lender. In the traditional retail model, you'll write a postdated check to the lender in the full amount of the loan plus fees, which is then redeemed on the maturity date.

Here's a breakdown of the typical requirements for a payday loan:

Before getting a payday loan, it's crucial to check if they're legal in your state and research the lender's reputation. You can check payday lender reviews on the CFPB's complaint database, the Better Business Bureau, and forums like Reddit.

Payday loans typically cost between $10 to $30 for every $100 borrowed, according to the Consumer Financial Protection Bureau. This translates to a simple interest rate of 10% to 30%, but due to their short repayment terms, payday loan APRs are usually 400% or more.

A two-week payday loan usually costs $15 per $100 borrowed. In some cases, if you don't repay the loan in full on the due date, the lender may add a fee to extend the due date, making it easy to get trapped in a cycle of debt.

Late fees and renewal or rollover fees can also be charged, with renewal or rollover fees ranging from $45 to $90 for borrowing $300 for just four weeks.

If you can't repay a payday loan, the lender could charge a late fee or returned payment fee, depending on the lender and your state of residence.

Your bank or credit union may also charge a nonsufficient funds fee or an overdraft fee if repaying a payday loan causes you to overdraw your account.

A debt trap is a situation where a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal.

76% of the total volume of payday loans are due to loan churning, where loans are taken out within two weeks of a previous loan.

This can leave most borrowers with inadequate funds, compelling them to take new payday loans immediately and continue paying high percentages to float the loan across longer time periods.

Payday loans typically cost $10 to $30 for every $100 borrowed, according to the Consumer Financial Protection Bureau. This means that if you borrow $100, you'll be charged between $10 and $30 in fees.

A two-week payday loan usually costs $15 per $100 borrowed, which is equivalent to a simple interest rate of 15%. However, due to their short repayment terms, payday loan APRs are usually 400% or more.

You may also incur other types of fees with your payday loan, such as renewal or rollover fees. If you pay a renewal or rollover fee of $45, you'll still owe the original $300 loan and another $45 finance charge when the extension is over.

Late fees may also be charged if you don't repay the loan on time, and your bank or credit union may impose an NSF or non-sufficient funds charge if your check or electronic authorization is not paid due to a lack of funds in your account.

The average monthly receivables for payday lenders are often in the millions, and their average charge-off is usually around 3.2% of the total amount. This means that payday lenders rarely exhibit any real effort to verify that the borrower will be able to pay the principal on their payday in addition to their other debt obligations.

In fact, 76% of the total volume of payday loans are due to loan churning, where loans are taken out within two weeks of a previous loan. This can lead to a debt trap, where borrowers are forced to take new payday loans immediately to pay off the previous one, resulting in a cycle of debt that's difficult to escape.

Payday loans in the United States have a devastating impact on borrowers, increasing personal bankruptcy rates by a factor of two, as a 2019 study found.

This means that people who take out payday loans are more likely to file for bankruptcy, which can have long-lasting consequences for their financial stability.

In the UK, a similar trend was observed, where payday loans caused persistent increases in defaults and led consumers to exceed their bank overdraft limits, as another 2019 study discovered.

Payday loans have a devastating impact on low-income communities. A 2019 study found that payday loans increase personal bankruptcy rates by a factor of two.

Rolling over debt is a common practice that can lead low-income individuals into a debt cycle. In states that permit three or more rollovers, low-income individuals are more likely to utilize payday lenders and pawnshops for loans.

Debt traps are a reality for many borrowers. In fact, 76% of the total volume of payday loans are due to loan churning, where loans are taken out within two weeks of a previous loan.

Some states allow payday lenders to file criminal complaints against late borrowers. In Texas, borrowers have been jailed for owing as little as $200, often due to job loss or reduced hours.

The debt trap is a vicious cycle that's hard to escape. Borrowers may need to take out new payday loans to pay the fees associated with debt rollovers, leaving them with inadequate funds and compelling them to take new loans immediately.

Household welfare increased due to payday loans, according to a staff report by the Federal Reserve Bank of New York. The report found that payday lenders can raise household welfare by relaxing credit constraints.

However, the high costs of payday loans are a concern, as they can lead to a reduction in household financial situation. This is because repeated rollover loans can impact a household's ability to pay recurring bills such as utilities and rent.

Interestingly, a study by Petru Stelian Stoianovici and Michael T. Maloney found no empirical evidence that payday lending leads to more bankruptcy filings. This casts doubt on the debt trap argument against payday lending.

A Federal Reserve Board (FRB) 2014 study found that while bankruptcies did double among users of payday loans, the increase was too small to be considered significant.

Payday loans are heavily regulated in the United States due to concerns over predatory lending practices. Federal regulation is in place to protect consumers, including the Truth in Lending Act of 1968, which requires lenders to disclose all fees and payment terms.

The Consumer Financial Protection Bureau (CFPB) has specific authority to regulate all payday lenders, regardless of size, thanks to the Dodd–Frank Wall Street Reform and Consumer Protection Act. This includes a 36% rate cap on tax refund loans and certain payday and auto title loans made to active duty armed forces members and their covered dependents.

Payday lenders have found ways to evade state laws by partnering with Native American tribes, but the Federal Trade Commission is now aggressively monitoring these lenders. Some states have also taken action against payday lenders that they believe are violating state laws.

Here are some alternatives to payday loans that are available to most consumers:

In the United States, payday lending laws vary from state to state. Payday lending is legal in 27 states, with 9 others allowing some form of short-term storefront lending with restrictions. The remaining 14 states and the District of Columbia forbid the practice.

Some states have laws limiting the number of loans a borrower can take at a single time. For example, in Florida, Michigan, Illinois, Indiana, North Dakota, New Mexico, Oklahoma, South Carolina, and Virginia, single, statewide real-time databases are required to verify a customer's eligibility before conducting a loan. This system has been effective in enforcing state statutes, as reported by state regulators.

Payday lenders have found ways to circumvent these laws by having borrowers take loans from multiple lenders. However, some states have implemented measures to prevent this, such as capping the number of loans per borrower per year or requiring lenders to offer lower-interest loans with longer terms after a certain number of renewals.

In some states, consumers can have more than one loan outstanding, as is the case in Oklahoma. This can lead to a cycle of debt that is difficult to escape. States that have prohibited payday lending have reported lower rates of bankruptcy and fewer complaints regarding collection tactics.

The District of Columbia has implemented its own regulations on payday lending. As of January 9, 2008, the maximum interest rate that payday lenders may charge is 24 percent, the same as for banks and credit unions. Payday lenders must also have a license from the District government to operate.

Here's a list of states that have prohibited payday lending:

These states have seen positive results from prohibiting payday lending, including lower rates of bankruptcy and fewer complaints regarding collection tactics.

In Georgia, payday lending was prohibited for over 100 years before a 2004 law made it a felony, allowed for racketeering charges, and permitted costly class-action lawsuits.

This law was later used to sue Western Sky, a tribal internet payday lender, in 2013.

The 2004 legislation was a significant step towards regulating the industry in Georgia, making it more difficult for payday lenders to operate.

The state's efforts to shut down the industry were finally successful with this law, showing that regulation can be an effective tool in protecting consumers.

The idea of postal banking has been floated before, and it's an interesting concept. Some countries already offer basic banking services through their postal systems.

In the past, the United States Post Office Department had a similar service called the United States Postal Savings System, which was discontinued in 1967.

There's been renewed interest in postal banking, with the Office of the Inspector General of the United States Postal Service issuing a white paper in January 2014 suggesting that the USPS could offer banking services, including small dollar loans for under 30% APR.

Critics argue that postal banking would force payday lenders out of business due to competition, and that the plan is actually a scheme to support postal employees.

Payday loans are not the only option for those in need of quick cash. In fact, there are many alternatives available. Pawnbrokers, for example, can provide a loan using the equity of your vehicle as collateral.

Credit unions offer loans with lower interest rates and more stringent terms, which take longer to gain approval. Employee access to earned but unpaid wages is another option. Some employers also offer paycheck cash advances, or "advance on salary."

Auto title loans use the equity of your vehicle as credit instead of payment history and employment history. If you own your own vehicle, this could be a viable alternative to a payday loan. The Pentagon Federal Credit Union Foundation (PenFed Foundation) Asset Recovery Kit (ARK) program is another resource for those in need.

Some companies, like Uber and Lyft, offer Instant Pay and Express Pay for their drivers. This can be a convenient option for those who need quick access to their earnings. NerdWallet is a website that helps redirect potential payday borrowers to non-profit organizations with lower interest rates or to government organizations that provide short-term assistance.

Borrowing from friends and family can also be an option, but it's essential to agree on the terms of the loan, such as when you'll pay it back. This can save you money on interest and avoid a credit check.

Asymmetric information is a significant issue in the payday loan industry, where borrowers often don't know how to calculate their loan's APR. This lack of knowledge can lead to borrowers being charged rates up to 390% interest annually.

Most borrowers don't realize they're being charged such high interest rates because they don't understand the formula for the total cost of a payday loan. The formula is complex and can result in massive interest payments if the loan isn't repaid on time.

A $100 payday loan with a 15% 2-week interest rate will balloon to $404.56 in just 20 weeks if not paid on time. This example illustrates the rapid growth of interest payments that can occur when a payday loan is not repaid promptly.

The interest on a payday loan can be much larger than expected, as seen in the example where the loan grows to $2,862.52 in 48 weeks. This highlights the importance of borrowers understanding the true cost of their loan before taking it out.