The payday advance industry provides financial services that meet the demand of consumers for short-term credit in small-dollar amounts. Payday advance lenders fill an important market niche and provide a valuable alternative credit resource—especially in the current economy. Recently, a poll conducted by Harris Interactive indicates that 77% of working Americans have little or no savings. These approximately 239 million individuals who live paycheck to paycheck may find themselves in serious debt if they encounter temporary, unexpected expenses outside of their regular budget. For those with limited access to funds through conventional loans offered by institutions like banks and credit unions, payday advance loans offer a viable means to stay on top of financial obligations and overcome cash shortfalls.
Current State of the Industry
Widely available to consumers throughout the country, about 20,600 payday advance retail outlets operate within the United States, according to current estimates. More than half of these locations are run by companies affiliated with the Community Financial Services Association of America (CFSA), a national trade organization that requires all members to adhere to a set of best practices that safeguard borrowers’ rights.
Larger payday advance companies often do business on a regional or national scale, with branded entities including both offices focused exclusively on payday lending, as well as multi-service providers that offer additional financial solutions, such as installment loans and title loans.
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What Has Driven the Rise of the Payday Advance Industry?
Several circumstances have contributed to the emergence and continued growth of the payday advance industry. Banks, finance companies, and other traditional lenders have often been unable to meet the demand for small, short-term credit because they are subject to legislation that hampers their ability to profit from these smaller loans.
Under the business model used by traditional financial institutions, small, short-term loans present high costs, excessive labor, and returns that are viewed unfavorably by investors. Even among those banks and finance companies that historically offered small, short-term loans, the service was largely abandoned upon deregulation of the banking industry during the 1980s, in order to concentrate on larger loans with higher profit margins.
From the perspective of many borrowers, payday loans represent a convenient, more affordable alternative than other options for securing credit to cover temporary cash shortages. For example, consumers face increasingly exorbitant fees and penalties for late bill payments, bounced checks, and overdraft protection. Banks and credit unions collect about $22 billion in charges for non-sufficient funds every year. In 2003 alone, late payment fees to businesses ranging from credit card companies to utilities cost Americans approximately $57 billion.
A Profile of Payday Advance Customers
A common misconception is that payday loan borrowers lack access to conventional checking accounts. However, a study investigating payday advance customer demographics conducted by researchers at the Georgetown University McDonough School of Business found that nearly all borrowers maintain an account with a bank or credit union, and over half have a credit card. Furthermore, respondents in the study were employed, the majority of them earning low- to mid-level incomes between $25,000 and $50,000. The study also revealed that the average payday advance customer falls below the age of 45, has a spouse, and lives in a home that includes children.
The study also found that payday loans are only used by 2% of American adults at any one time, and that these people typically have minimal cash savings and less access to credit. By and large, these customers use payday loans sparingly and for their intended purpose—to bridge occasional monetary shortages when unbudgeted expenses arise.
The findings also demonstrated that payday loan borrowers predominantly remain well-informed on the expenses of the service and are pleased with the product they receive. Using a representative sample of customers of CFSA member companies across the nation, the review determined that 95% could accurately declare the finance charge for their loan and 88% of borrowers evaluated their transaction favorably.
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