A payday loan is a specific short-term credit product. It offers consumers a fairly small amount of money, offered as a loan, that can be used to pay bills or meet emergency obligations. This loan comes at an extremely high interest rate and often requires the consumer to repay the amount, in its entirety, with their next paycheck.
According to the Consumer Financial Protection Bureau, there is no set definition for a payday loan. State laws in the U.S. vary on what may or may not qualify. Limits for loans within this industry are usually set around $500, but smaller or larger sums may be permitted for some providers.
In the past, a post-dated check would often be used to pay off the loan. The check would be written at the time the loan was processed. Then it would be cashed once the consumer who receive the loan was paid. Today, however, the industry will also schedule an ACH transaction for the consumer’s next payday to automatically withdrawal the required amount from their accounts.
Fascinating Payday Loan Industry Statistics
#1. In the United States, about 2.5 million households use at least one payday loan each year. That means about 1 in 50 Americans uses a product offered by this industry annually. (The Economist)
#2. The average loan that is offered in the United States is $350. The loan itself lasts for 14 days and costs the consumer an average of $15 for every $100 that is borrowed. (The Economist)
#3. More than $9 billion in loan fees is generated by the payday loan industry in the United States each year. The average consumer will pay about $520 in fees for their ability to borrow $350 during the year. (Pew Charitable Trusts)
#4. The average borrower for the payday loan industry earns about $30,000 per year. 58% of consumers that take advantage of these short-term loans struggle to meet their monthly financial obligations. (Pew Charitable Trusts)
#5. About 70% of borrowers who use payday industry products are using them for their regular recurring expenses, such as rent, even though the industry advertises the product as being for unexpected or emergency expenses. (Pew Charitable Trusts)
#6. There are 14 states in the U.S. where the payday loan industry is not allowed to operate because of capped interest rates and other restrictions. (Pew Charitable Trusts)
#7. The average interest rate that is charged by the payday loan industry is 391%. (Pew Charitable Trusts)
#8. To fulfill the payment obligations of a payday loan, the average consumer will pay $430 out of their next paycheck. That means the average borrower will lose 36% of their paycheck to the payday loan industry every two weeks. (Pew Charitable Trusts)
#9. 80% of payday loans that are used by consumers in the U.S. are taken within 14 days of repaying a previous loan. (Pew Charitable Trusts)
#10. People in the 25-49 age demographic are the most likely to use payday loans. People above the age of 70 are the least likely to use this type of financial product. (Finder)
#11. African-Americans/Blacks in the U.S. are twice as likely to use a payday loan product at least once in the next 12 months when compared to other races or ethnicities. (Finder)
#12. Renters are also twice as likely to use payday loans compared to households that own their own home. People who are living on disability payments or are unemployed are more likely to take out a payday loan as well. (Finder)
#13. Over 80% of loans that are offered by the payday loan industry are either rolled over or followed by another loan within 14 days, even within states that require cooling-off periods before taking out another loan. (Consumer Finance Protection Bureau)
#14. For borrowers within the payday loan industry that have not renewed or defaulted during the year, just 60% of them took out just one loan. (Consumer Finance Protection Bureau)
#15. On all new loans provided by the industry in the United States, 4% of consumers will default on the amount borrowed. 22% of consumers will extend their loan sequence to 7 incidents or more. 15% of sequences extend for 10+ loans. (Consumer Finance Protection Bureau)
#16. Over 80% of the payday loans that are offered in sequence have either no change or an increase in the amount which is being loaned. (Consumer Finance Protection Bureau)
#17. 74% of borrowers who use a payday loan product during the year will have no more than two sequences for their outstanding obligations. 48% of payday loan consumers have a single loan sequence. (Consumer Finance Protection Bureau)
#18. Two-thirds of new borrowers in the payday loan industry renew their loan at some point during the year. New borrowers are just as likely to default as they are to fully repay their obligation. (Consumer Finance Protection Bureau)
#19. In the United States, the payday loan industry has an estimated value of up to $50 billion. Even with tighter regulations in place, some markets are expected to see a CAGR of up to 30% in the next 5-year forecast period. (Trihouse Consulting)
#20. The average payday loan lead generation company can sell leads to loan generators for up to $185 per application. (Trihouse Consulting)
#21. On a $100,000 amount invested into loans, the average payday loan operator can generate up to $30,000 in profits each month. (Trihouse Consulting)
Payday Loan Industry Trends and Forecast
The payday loan industry has come under heavy levels of scrutiny over the past 10 years. Regulations have limited how much interest can be charged on these short-term loans. Some states, like Colorado, have made it a requirement to extend payday loans to a 6-month repayment plan instead of a 14-day repayment plan.
When states have changed the laws regarding firms in the payday loan industry, many of them have decided to close. About half of all the payday loan stores in Colorado decided to close when the state required changes to how these loans are repaid.
Even so, this industry is still strong in areas where it is not prohibited. In 2014, there were more payday loan lenders in the U.S. then there were McDonald’s locations. About half of consumers who use payday loans will complete 10 or more transactions over a 12-month period. Even with the 14-day turnaround on a loan, the average consumer was responsible for a payment to a provider in this industry for 199 days.
Continuing regulations are expected to tighten, furthering the difficulties in achieving high profit margins that were available in the past. For the providers that survive, however, there is still a lot of profit potential available in this industry.