University of Georgia

Payday loans not just a poor person’s issue

payday loan application

A team of researchers led by faculty at the University of Georgia found that payday loan borrowers often come from middle- and higher-income households, not just poor or lower-earning populations.

Mary Caplan, an assistant professor in the School of Social Work at UGA, led a study that analyzed a nationally representative dataset from the Federal Reserve Board’s 2013 Survey of Consumer Finances.

The survey was administered among 6,015 U.S. households, and it includes information about income, pension, spending, debt and the use of financial services.

Borrowers can take out these loans online or in person with companies advertising small dollar and quick cash loans, but the interest rates tend to be high.

“There’s this idea that payday loans are specifically used by people who are poor,” Caplan said. “I wanted to find out whether or not that’s true.”

The study grouped borrowers into five income-based quintiles and found that there are payday loan borrowers in low-, middle- and high-income households.

The researchers found that payday loan borrowers are more likely to be African-American, lack a college degree, live in a home that they don’t own and receive assistance such as SNAP or TANF.

The researchers also looked at social support and its relation to payday loan borrowing and found that more than 38 percent of borrowers couldn’t ask family and friends for $3,000 in a financial emergency.

“It’s nearly a two-fold increase in the likelihood that someone would turn to a payday lender if they don’t have a family member or a friend that they can borrow $3,000 from,” said Robert Nielsen, professor and head of the consumer sciences department at the University of Alabama, who helped to analyze the dataset.

What was surprising, the researchers said, was that payday loan borrowing is something that people from high-income households do as well. The top 20 percent of income earners had a payday lending use rate of just over 1 percent.

People from high-income households may take out payday loans because of the high cost of living in some areas and unstable job markets, Caplan said.

“People in the so-called middle class used to have one job and keep it for decades,” Caplan said. “This is no longer the case. People who are in the upper income quintile, which starts around $110,000, may seem well off, but in reality, their financial lives can be quite precarious.”

Also important is the fact that the top 20 percent of earners in the U.S. is an economically diverse group that ranges from households making $150,000 to millionaires and billionaires.

“It’s unlikely that those two last groups of people are taking out payday loans,” Caplan said. “But for households who need a quick $300 in cash right before payday and whose credit may be tapped out, a payday loan may be just the ticket. More research is needed to fully understand it though.”

Some borrowers reported taking out payday loans for emergencies, paying bills and other loans, buying medicine, paying rent and buying gas.

Peter Kindle, an associate professor of social work at the University of South Dakota who also worked on the project, said it makes sense that some people turn to payday loans when they are in financial binds because they have nowhere else to turn.

“There’s no other resource that’s available to some of them,” Kindle said. “If the hot water heater goes out and you’ve got to replace it, it makes perfect sense. If you don’t have the $400, $500 or $800 that it takes to deal with an emergency like that, where are you going to get it?”

Caplan stressed the importance of not characterizing payday loans as a problem that only poor people face. She said that Kindle’s perspective on payday loan borrowing helped to shape the way she studies it. She no longer refers to payday lending as predatory lending, but instead uses the term alternative financial services.

“I think that when we characterize something as a problem of poor people, then it gets marginalized in our culture,” Caplan said.

Caplan is an evaluator of a project called Commonwealth Athens, a program that refinances loans for smaller interest rates and provides financial literacy for people within the community.

“This is an issue that touches every income quintile,” Caplan said. “Therefore, this is an American issue.”