Payday Lending: Taking the Pay Out of Payday by the California Budget Project is our Site of the Day

The California Budget Project has just released a 51 page report, Payday Lending: Taking the Pay Out of Payday that examines how payday loans work, who uses payday loans, why Californians use payday loans, alternatives to payday loans, and much more.

Bottom line conclusion: Payday lenders provide short-term, high-cost loans that lead to chronic borrowing by low and moderate-income Californians

Here are the key findings from this report:

• Payday loans are expensive. In California, a 14-day loan has an annual percentage rate (APR) of more than 400 percent. The APR represents the percentage cost of credit on a yearly basis, including interest and any applicable fees.

• Payday lending is widespread. Approximately 1 million Californians took out payday loans in 2006, averaging roughly 10 loans per borrower.

• Payday loans encourage chronic borrowing. A 2007 survey of payday loan borrowers in California found that:
– Nearly half (48 percent) of borrowers take out payday loans at least once per month.
– More than one-third (36 percent) of borrowers have taken out loans from multiple payday lending companies at the same time.

• Most payday loan borrowers in California use these loans to meet basic expenses, rather than for short-term emergencies.

• Most payday loan borrowers in California are women and have household incomes under $50,000. Disproportionate shares of payday loan borrowers in California are black or Latino.

• The federal government restricts payday lending, as do more than one dozen states and the District of Columbia.

• Californians would have alternatives if state policymakers restricted payday lending. These alternatives include:
– Non-loan options, such as negotiating with creditors and seeking emergency assistance.
– Less-costly credit union, bank, and consumer finance loans, as well as credit cards and overdraft protection.

Payday loans will surely be the subject of legislation next year in California and this report will be key in assessing where the state should be headed.