payday lending research september 30, 2013
TRANSCRIPT
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Pew’s Consumer Financial Security Work
www.pewtrusts.org/small-loans
Safe Small-Dollar Loans
• pewtrusts.org/small-loans
www.pewtrusts.org/money
• Checking, debit and overdraft
• Prepaid cards
• Credit cards
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How Payday Loans Work
• Packaged as “short-term” loan for “temporary needs”
– Obtained from storefronts, online, some banks
• Little to no underwriting
– Borrower has an income source and checking account
– Lender can debit account to collect payment (deferred presentment)
• Short repayment period, tied to borrower pay cycle
– Balloon or lump-sum repayment
– If borrower cannot pay that, pays fee to renew, or borrows again
• Avg. loan is $375
– Fee per 2 wks: $55 store, $95 online, $35 bankwww.pewtrusts.org/small-loans
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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% to those using 12+
– Average borrower in debt five months during year
• Consecutive usage is the norm
– More than three quarters of loans originated before next pay period
• Profitability of payday lenders depends on repeat borrowing
– 4 to 5 loans before customer is profitable (industry estimate)
• High overhead costs
– 2/3 of revenue covers overhead; 1/6 covers losses
www.pewtrusts.org/small-loans
State of Regulation
www.pewtrusts.org/small-loans 5
55% of population
16% of population
29% of population
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Methodology – Pew Survey Research
• First-of-its-kind survey of American payday loan borrowers
– Random Digit Dialing, including cell phones, Spanish, minimum of six attempts per phone number
Two-part survey:
• Omnibus (49,684 total screens)
– Margin of error +/-0.2 percentage points (usage and demographics)
• Follow-up, in-depth survey with 451 to 703 borrowers
– Margin of error +/- 4.2 to 4.6 percentage points (opinion research)
• 10 two-hour borrower focus groups in five cities
www.pewtrusts.org/small-loans
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Renewing is Affordable, But Paying Off is Not
www.pewtrusts.org/small-loans
< $430 $375 principal + $55 fee = $430 due in two weeks
Report: 2/2013 See p.14
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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
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Payday Loans Do Not Eliminate Overdraft Risk
www.pewtrusts.org/small-loans Report: 2/2013See p.32-35
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Payday Loans Do Not Eliminate Overdraft Risk
www.pewtrusts.org/small-loans Report: 2/2013See p.32-35
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Deposit Advance Loans Do Not Eliminate Overdraft Risk (CFPB Report)
www.pewtrusts.org/small-loans CFPB Data
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By Nearly a 3-to-1 Margin: Borrowers Want More Regulation
www.pewtrusts.org/small-loans Report: 2/2013See p.48
www.pewtrusts.org/small-loans
Project Director:Nick [email protected]
Research:Alex [email protected]