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Small-Dollar Loans Research
National Federation of Community Development Credit Unions
June 7, 2013www.pewtrusts.org/small-loans
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Pew’s Consumer Financial Security Work
Safe Small-Dollar Loans
• pewtrusts.org/small-loans
www.pewtrusts.org/money
• Checking, debit and overdraft
• Prepaid cards
• Credit cards
www.pewtrusts.org/small-loans
How Payday Loans Work
www.pewtrusts.org/small-loans 3
• Packaged as “short-term” loan for “temporary needs”
• Borrower has income and checking account
– Writes a check, post-dated for next payday, or gives electronic authorization to debit account
• Repayment due on borrower’s next payday
– Conventional payday loan is 2 weeks w/ single lump-sum repayment
– If borrower cannot pay that, pays fee to renew or re-borrow before next payday
• Average loan size $375
• Avg. fee per two weeks $55 storefront
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Payday Loan Business Model
• Nearly all loans go to repeat borrowers
– 97% of loans go to those using 3+ per year
– 63% of all loans go to people using 12+ per year
• Consecutive usage is the norm
– More than three quarters of loans originated before next pay period
• The business model requires extended or repeat usage
• Similar problems may arise in installment lending variations
– Refinancing (“loan flipping”), add-on fees
www.pewtrusts.org/small-loans
Methodology – Pew Survey Research
• First-of-its-kind survey of American payday loan borrowers
• Two-part survey:
– Omnibus (49,684 total screens), demographic and usage
– Follow-up, in-depth survey with 703 payday borrowers
• 10 two-hour borrower focus groups in five cities
www.pewtrusts.org/small-loans 5
The Fundamentals (Pew’s July 2012 Report)
www.pewtrusts.org/small-loans 6
Why Do Borrowers Use Payday Loans?
www.pewtrusts.org/small-loans 7
What Would Borrowers Do Without Payday Loans?
www.pewtrusts.org/small-loans 8
State Of Regulation
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55% of population
16%
29%
Payday Lending Regulation Is Not Leading To Increased Online Borrowing
www.pewtrusts.org/small-loans 10
How Borrowers Choose and Repay (Pew’s February 2013 Report)
www.pewtrusts.org/small-loans 11
Most Use Payday Loans For Recurring Expenses
www.pewtrusts.org/small-loans 12Report:See p.10
Renewing Is Affordable, But Paying Off Is Not
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< $430
Renewing Is Affordable, But Paying Off Is Not
www.pewtrusts.org/small-loans 14Report:See p.15
www.pewtrusts.org/small-loans 15
So, why do people use unaffordable loans?
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Why People Use Unaffordable Loans
www.pewtrusts.org/small-loans Report:See p.20
Why People Use Unaffordable Loans
www.pewtrusts.org/small-loans 17Report:See p.22
Why People Use Unaffordable Loans
www.pewtrusts.org/small-loans 18Report:See p.23-25
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What Are the Options?
www.pewtrusts.org/small-loans
Payday Loan,Cash Advance
Home Equity
Credit Card
Bank / CU /Installment
Loan
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What Are the Options? Seeking Credit vs. Seeking Ways to Manage Finances
www.pewtrusts.org/small-loans
Payday Loan,Cash Advance
Home Equity
Credit Card
Bank / CU /Installment
Loan
Budget / Cut Back
Delay Paying
Bills
Family / Friends
Sell / Pawn
41%Payday borrowers
own a home
60%Payday applicants have a credit card
CREDIT OPTIONSOTHER OPTIONS
81%
62%
57%
57%
Payday borrowers who would use these
options if payday loans did not exist
Paying Off The Loans
www.pewtrusts.org/small-loans 21Report:See p.37
Payday Loans Do Not Eliminate Overdraft Risk
www.pewtrusts.org/small-loans 22Report:See p.32-35
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Loans Take Advantage… But Also Help
www.pewtrusts.org/small-loans Report:See p.39-44
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Borrowers Have Torn Feelings
www.pewtrusts.org/small-loans Report:See p.42
Borrowers Want Changes
www.pewtrusts.org/small-loans 25Report:See p.39-44
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By Nearly a 3-to-1 Margin: Borrowers Favor More Regulation
www.pewtrusts.org/small-loans Report:See p.48
www.pewtrusts.org/small-loans
Project Director:Nick [email protected]
Research:Alex [email protected]
Media Relations:Samantha [email protected]
