State regulatory data show that low-income borrowers who use payday loans take out an average of eight payday loans a year, which costs them about $520 annually in interest on those loans that average $375 each, according to a study released Wednesday by the Pew Charitable Trusts.
The Pew report also found that while most payday borrowers are white women between 25 and 44 years old, five groups have higher odds of using payday loans: people without a four-year college degree, renters, African-Americans, people earning less than $40,000 a year and people who are either separated or divorced. Although a higher percentage of the African-American population uses payday loans, the overall number of white women using them is higher.
"A major concern about payday loans is that the packaging does not match the experience," said Nick Bourke, a project manager at Pew Charitable Trusts in Washington, D.C. "The loans are advertised as short-term, yet the average borrower is in debt for five months.
"Also, they advertise these loans as being important for emergencies, but the vast majority of borrowers return to these loans for basic living expenses such as rent, utilities, credit card bills and food. The gap between the packaging of these loans and their actual usage is wide and concerning."
In the report, "Payday Lending in America: Who Borrows, Where They Borrow, and Why?" Pew researchers found Pennsylvania has some of the toughest laws governing the industry in the nation. A new bill working its way through the Legislature, however, would allow storefront payday lenders to again set up shops in the state, increasing the likelihood of more residents using such loans.
The report's findings are intended to help policymakers address problems with small-dollar loans and to promote a safe and transparent marketplace for low-income consumers who borrow small sums of money.
In studying states such as Pennsylvania, where regulations have basically eliminated storefront lending sites, Pew found much lower payday loan usage overall.
"Storefront restrictions are effective in lowering payday loan borrowing rates," Mr. Bourke said. "Right now Pennsylvania has one of the lowest rates of payday loan usages in the country. The data suggests that if payday loan storefronts become authorized, the level of payday loan usage will increase dramatically."
Each year, 12 million borrowers spend about $7.4 billion on payday loans, according to the Pew Charitable Trusts.
Payday lending is not illegal, but was effectively regulated out of existence in Pennsylvania through rules set by the state Department of Banking. The rules set limits of 24 percent interest on small loans. For a brief time, payday lenders found a way around the regulations by partnering with commercial banks.
In 2005, the Federal Deposit Insurance Corp. decided it did not want commercial banks to be involved with payday lenders, effectively causing such lenders to withdraw from Pennsylvania.
Currently, 15 other states and the District of Columbia have restrictions similar to those in Pennsylvania. A total of 28 states permit payday lenders to operate storefront operations, and eight states have laws that allow payday loan storefronts to operate with some restrictions.
While payday lenders cannot open storefronts in Pennsylvania, residents can do business with online payday lenders. Pew found that most borrowers are not inclined to do so.
"We looked at this issue and found that state storefront payday loan regulations do not drive people online," Mr. Bourke said.
"Online payday loan usage rates are the same across the states, no matter if payday stores are available there or not," he said. "If payday stores aren't available, 95 percent of would-be borrowers elect not to use payday loans at all."
Tim Grant: email@example.com or 412-263-1591.