When we think about what kinds of
people use payday loans - those volatile forms of short-term borrowing that
come with jaw-dropping origination fees and astonishing rollover penalties -
it's hard not to begin generalizing. Particularly when we consider the often
rundown payday shops, complete with neon lights and iron bars on the windows.
But would you be surprised to hear that the average cash advance borrower isn't
wallowing in poverty? They're not just homeless, single mothers, or ignorant
teenagers either. No, the average payday loan borrower is something entirely
different, and something many wouldn't immediately suspect.
What are payday loans?
In order for us to paint a picture
of the average payday loan borrower, we first must understand how this type of
financing works.
Payday loans are a form of
short-term financing that requires a paycheck as collateral. Borrowers
typically write postdated checks, hands those checks to their lenders, and in
return they receive a cash-advance. Then, come a borrower's next payday, the
lender deposits that postdated check and the financing is considered satisfied,
hence the name of these loans.
One important note, however, is
those postdated checks are written for not only the amount an individual
borrowed, but also for the fee charged in order to borrow the money. That fee
is usually in the ballpark of $15 per $100 borrowed. So if someone sought a
$200 loan, their postdated check would be for $230.
So Who Borrows Payday Loans?
Since this method of borrowing
involves high-almost usurious-fees in conjunction with short and poor terms,
many associate it with the uneducated and low-income populations. But that's
not necessarily true.
According to a recent study by
Patchwork Nation, "the profile of borrowers is surprisingly
variable."
Payday loans, by sheer mechanics
alone, require that borrowers have a checking account in order make use of
their services. That immediately removes most of the homeless from the
eligibility pool, and even most teenage adults.
Surprised? As depressing as it may
be, only one in five teenagers have a checking account, according to a
study by the National Consumers League.
And while there are some
lower-income borrowers, the study found that most are not chronically poor and
that the majority of payday lenders actually require borrowers to have a job.
In fact, the study said the average payday loan borrower makes between $25,000
and $50,000 a year.
J.D. Foster, an economist and senior
fellow at the Heritage Foundation, told Reuters that "middle class"
can be defined by those households which make between $25,000 and $100,000
annually. If we can accept Foster's definition, then most payday loan borrowers
are actually individuals from the middle class.
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