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Feb 5 2017

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Payday Loans: Time for Review

Beginning in the 1980s and 1990s, storefront payday loan businesses began to spring up across the country and quickly became commonplace. Today, there are approximately 20,000 storefront lenders, 1 an average of 6.3 payday stores for every 100,000 people. 2 By comparison, in 2012, there were 14,157 McDonald’s restaurants in the United States. 3 Additionally, payday loans are increasingly offered online. The growth and success of the industry shows that payday loans are in demand and fulfill a need for many people.

Payday lenders, a type of alternative financial service providers, tend to be concentrated in locations with higher-than-average poverty rates, lower income levels, more single parents, and some minority groups. 4 For example, a 2013 study in California found more payday loan stores located in areas with higher percentages of blacks and Latinos and in areas with high poverty rates and lower levels of educational attainment. 5 This essay provides an overview of payday loans, borrower characteristics and habits, and regulations.

What Are Payday Loans?

Payday loans are small-dollar, short-term loans generally for $500 or less. They are appropriately called “payday loans” because the duration of a loan usually matches the borrower’s payday schedule. A balloon payment full payment of the loan plus fees is generally due on the borrower’s next payday after the loan is made. The typical length of a payday loan is 14 days, but loan lengths vary based on the borrower’s pay schedule or how often income is received so the length could be for one week, two weeks, or one month. Borrowers who are paid more frequently could potentially take out many more loans over a given time period than borrowers who are paid monthly.

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