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Many people think of payday loans as a way to cover an unexpected emergency – such as a car repair or medical expense – until your next paycheck comes in.
But nearly seven in 10 people who use the short-term, high-fee loans rely on them for recurring, everyday expenses such as rent, food, utilities or car payments, according to a report published Wednesday.
And instead of using them for one quick fix, many are either seeking extensions or borrowing similar amounts again and again. That’s putting many people in debt to payday lenders for months at a time, at very high cost.
“It’s not because of some unusual need that people are turning to payday loans. It’s because of some regular need,” said Nick Bourke of the Pew Center on the States, which published the report.
Payday lenders defend their industry, saying today's economic reality is that many people regularly need a financial bridge to their next paycheck.
“Of course there’s recurring use for this product. It’s often the best option for millions of Americans that are looking to manage their financial obligations,” said Amy Cantu, spokeswoman for the Community Financial Services Association of America, a trade group for payday lenders.
About 5.5 percent of American adults have used a payday loan in the past five years, and 12 million used them in 2010, the most recent data available. Demographic data compiled by Pew suggest that customers are typically parents, divorced people and others struggling to get by.
The Pew researchers found that parents are more likely to use payday loans than people without kids, especially if the household income is less than $50,000 a year, about the nation's median.
In addition, people who are separated or divorced are more likely to use them than those who are married or single.
The vast majority of people using payday loans don’t have a four-year college degree, and seven in 10 have a household income of less than $40,000 a year.
More than half of the people using the loans are white, female and between 25 and 44 years old. But that’s partly a function of demographics. African-Americans, which represent a smaller chunk of the population, are more likely to use payday loans than other races and ethnicities.
The loans are typically for $100 to $500, and lenders typically charge $15 for each $100 that is borrowed for a two-week period, according to the Pew report.
Pew found that the average user takes out eight loans of $375 each year and spends $520 in interest. The researchers said the repeated use means that the loan is functioning more like a high-interest line of credit than a short-term fix to a one-time problem.
“People are paying a lot more in payday loan costs and fees than they anticipate going in,” Bourke said.
Cantu, of the lenders trade group, said the fees associated with payday loans are clear to those who use them.
“We’re completely transparent on the terms of service and the costs associated with this product, and consumers choose it because it’s the least expensive option,” she said.
But Pat Seaman, senior director with the National Endowment for Financial Education, said payday loans are among the most expensive ways to borrow money, and the group's research has shown people turn to them as nearly a last resort.
She suggests that low-income families try to avoid taking out such short-term loans by having an emergency fund of as little as $500. That’s far less than the six to nine months in living expenses many financial experts recommend, but she said it’s a more approachable goal that can help low-income people make it through a tough spot.
If you do use a payday loan, Seaman said to just be sure you clearly understand the terms of the loan, and the fact that the lender is in it to make money as well as provide you with money.
Many states have tightened restrictions on payday lending, and Pew’s research showed that tighter restrictions led to less use.
This year, the new Consumer Financial Protection Bureau began supervising payday lenders at the federal level for the first time. That allows the government watchdog to investigate whether practices are harming customers and to take action when necessary.
The Pew report is based on a broad survey of the general population as well as in-depth focus groups it conducted with people who use payday loans.
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