Payday Loans: More Trouble Than They're Worth

NEW YORK ( TheStreet) -- Many people facing financial trouble turn to payday loans, believing their problems may be alleviated. But research indicates these loans create more headaches for already-troubled consumers.

A report from The Pew Charitable Trusts show that 12 million Americans use a payday loan every year. The study, Payday Lending in America: How Borrowers Choose and Repay Payday Loans, notes the average payday loan requires a repayment of more than $400 in two weeks, but the average borrower can afford only $50. This leads them back to some of the choices they tried originally to avoid, such as overdraft fees, borrowing from family or friends and long-term debt.

The research showed that Americans spend $7.4 billion on these payday loans each year. On the average, borrowers are indebted for five months and pay an average of $520 in interest on loans that average less than $400. Payday loans are a very short-term fix that create a bigger problem as interest payments grow.

"Payday loans are marketed as an appealing short-term option, but that does not reflect reality. Paying them off in just two weeks is unaffordable for most borrowers, who become indebted long term," says Nick Bourke, Pew's expert on small-dollar loans. "The loans initially provide relief, but they become a hardship."

The survey also showed:
  • 58% of payday loan borrowers have trouble meeting monthly expenses at least half the time.
  • Only 14% say they can pay their loan from their monthly budget.
  • When considering payday loans, 78% of the borrowers believe information provided by lenders.
  • A large majority of borrowers want more regulation for payday loans and want to change how payday loans work.

Bill Hardekopf is chief executive of LowCards.com, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."

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