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The Growth of Payday Lending
In the early 1990’s, the corner payday advance, cash advance, or payday loan store was virtually non-existent. Today, there are more than 10,500 stores across the country, with more opening every day, and a large number of online or virtual stores that service anyone with an Internet connection. In 2003, approximately 14 million US households used the option of a cash advance or payday loan, and this number has grown daily. This industry has grown from nothing to a multi-billion dollar industry in a very short period of time. What does this industry offer that has caused such phenomenal growth?
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One of several trends that are identified as factors in this growth is the scarcity of physical branches of traditional financial institutions (banks, savings and loans, and credit unions) in older, lower-middle class areas. In the seventies and eighties, these neighborhoods relied on conveniently located pawnshops and check-cashing stores to service their short-term financial needs. As payday lending began to be offered as options in these types of stores, this type of loan was readily accepted. These areas are considered to be underbanked in the traditional sense.
Another factor involved in the growth of this industry is stagnation of real wages in the service sector of the economy. An increasing number of lower-middle class workers are finding themselves living paycheck to paycheck. People in this group also, whether because of no credit history or a bad credit history, have found themselves with fewer traditional options when they experience a cash flow emergency.
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Because of the risk involved in servicing these types of unsecured, very short-term loans, the interest rates or flat fees to service these loans are at an extremely high APR (annual percentage rate). However, all of the borrowers have checking accounts; it is a prerequisite of the loan. Also, most of the borrowers have jobs, and the rest have a source of regular income—also a prerequisite. While there is a default rate of around 20%, most of the lenders have direct access to the customer’s bank account and can roll the loan over and withdraw the loan fee automatically. This level of control decreases the risk involved for the lender, and also ensures the high level of profit on these loans. In fact, the industry is so lucrative that many of the major banks in the US are funding these loans through the payday advance lenders.
This type of cash advance loan fills a need in the community it services. Most customers are young, hardworking, rent their housing rather than own, and have not had a chance to build credit or savings through traditional means. They value the availability of “instant” cash without any “hassle” and feel uncomfortable with, or are unfamiliar with, the more traditional options of overdraft protection for checking accounts, personal loans through their bank or credit union, cash advances through bank credit cards, loans from family members, or loans and consumer education through community agencies.
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* Cash-Advance-USA.org provides information and research on cash advances/payday loans. We are not a payday lender or broker, nor are we necessarily affiliated with the companies profiled on this site. Not all products and services are available in each state.
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