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A new report shows that American consumers generally turn to payday loans for very similar reasons. Entitled Payday Lending in America: How Borrowers Choose and Repay Payday Loans, the report shows some very interesting trends about what attracts consumers to payday loans. The findings show motivations comprised of both convenience and necessity – the appeal of payday loans appears to lie in their easy accessibility and their essential function as a financial crutch for millions of Americans each month.
Here are some of the top reasons as mentioned in the survey:
Payday loans turned to as a means of avoiding long-term debt
As payday loans are available for a few weeks at a time and can be found easily through online aggregation services with fast approval procedures, they represent an appealing way to borrow in the short-term in order to avoid longer term debt. For example, a consumer that may need to borrow a few hundred dollars in order to stave off a more pressing debt might consider a payday loan as a viable short-term solution to avoid far worse consequences.
Cash advance loans turned to as an alternative to asking family members
Most of the consumers surveyed expressed an aversion to asking friends and family members for a loan when short on cash. Applying for and receiving a payday loan can be done anonymously online, without the need for face-to-face contact with a lender and, most importantly, without the need to discuss one’s personal financial predicament with loved ones. A payday loan can be borrowed privately, with minimal electronic paperwork. This is a highly important feature to many consumers as one that enables them to feel more self-sufficient than relying on a loan from a relative.
An express loan taken to cover monthly expenses
According to the survey, 58% of payday loan borrowers struggle to cover monthly expenses and at least 6 months of the year. Thus, persistent shortfalls in cash cause a high number of American consumers to use payday loans out of necessity. Without such loans, they simply would fail to make the month and would find themselves in more debt.
Payday loans turned to due to transparent terms provided by lenders
Although banks can be very vague about interest rates, charges and fees, payday lenders are held to a higher standard of disclosure due to the Truth in Lending Act and various state laws on cash advances. Accordingly, payday lenders need to make the total amount of fees and charges crystal clear before a borrower accepts a loan. Consumers may be more inclined to accept a payday loan where they feel that the lender is being very transparent about how much it will cost them to borrow. The survey supports this, by showing that 78% of borrowers rely on the information given to them by lenders when deciding to take a payday loan.
Payday loans used as an alternative to overdrafts on a checking account
A mistrust of banks and an unwillingness or inability to use a bank overdraft means that consumers see payday loans as an attractive alternative. As some payday loans can be obtained without a credit check, this is also important for consumers that have low credit scores.
Short-term funds to cover an unexpected cost
The lack of bureaucracy and fast payout time of certain payday loan services make them ideal for getting quick cash to cover an emergency one-off expenditure, such as an uninsured vehicle that needs repairing or a broken down household appliance that needs to be replaced.
When do you think it is OK to use a payday loan? What have you used a payday loan for? If you are considering using one for the first time, what would make you feel more comfortable to do so? Tell us what you think by posting a comment!
