Payday loans — small, short-term loans secured against a customer’s next paycheck — are highly controversial. A new study from Pew Charitable Trusts explains that opponents believe the practice “preys” on people who, because of the high interest rates and other fees, struggle for months to repay loans promoted as lasting a few weeks. Proponents of the practice claim it provides fast relief for “underserved people.” According to the Pew study, roughly 5.5% of Americans borrowed against their paychecks between 2005 and 2010.
The prevalence of payday loans and legislation regulating them vary from state to state. Several states prohibit payday loan storefronts altogether, suggesting that the loans take advantage of low-income borrowers. However, the practice either is tolerated with restrictions or is relatively unregulated in most of the country. In several states, more than 10% of adults reported taking out a payday loan at least once in the last five-years. Based on the Pew report, 24/7 Wall St. identified the nine states where the highest percentage of residents had taken out payday loans.
Pew identified three categories of payday loan regulation. “Restrictive” states either outlaw payday loans altogether or legislate a low maximum interest rate that makes the business unattractive for lenders. States that allow the practice but have strict regulations on at least one aspect of it — be it the rate, term or amount of loans allowed — are “hybrid” states. Those states that have fewer restrictions and allow charges of 15% or more of the borrowed principal are “permissive.”
According to Pew, the results of effective regulation are significant. “In states that enact strong legal protections, the result is a large net decrease in payday loan usage,” the report found. In the states labeled as restrictive, usage of payday loans is 75% lower than in permissive states. 24/7 Wall St. found that the states with the highest percentage of residents who reported using payday loans were overwhelmingly permissive states.
In the country, 28 states are permissive, eight are hybrid and 15 are restrictive. However, of the nine states on our list with the highest rates of payday lending, eight are permissive, while only one, Washington state, is a hybrid.
One aspect of a payday loan that states tend to regulate is its term. At the end of a term, the borrower is typically required to repay the loan. In many states, the lending period can be as little as seven days, which often leads to borrowers being unable to meet the payment. This forces many borrowers to either pay a fee to extend the loan or pay off the loan and immediately take out a new one. It is also why the average loan period is five months, according to Pew.
“The reason why payday loans end up having very high costs is not because of a long duration. It’s because they generally have a short duration, and the borrower keeps reborrowing,” Alex Horowitz, research manager for the Pew State Small Dollar Loan Research Project, told 24/7 Wall St. Five months of debt is particularly expensive because borrowers regularly take out up to eight separate loans in order to roll over or renew the original debt.
24/7 Wall St. also reviewed the number of payday lending storefronts in each state. While not always the case, states with higher percentages of the population reporting use of payday lending also had more storefronts available per 10,000 households. Horowitz explained that “people that live in a state that has storefronts — meaning a permissive or a hybrid state — are 169% more likely [to use payday loans] than someone living in a restrictive state.” As an example, in “restrictive states we see about 2.9% usage, and we see over 6% in hybrid and permissive states.”
According to Pew’s report, certain groups are more likely to take out these loans. Those who are divorced or separated are more likely to use payday loans than those in any other relationship status. A much higher percentage of people with less than a college degree engaged in payday borrowing than those with a college degree or greater. The strongest indicator was income. Those who earned less than $40,000 annually were nearly three times more likely to use payday loans than those who earned more.
A review of the nine states on our list — those with the highest rates of payday loan usage — shows that many of these states also have larger proportions of the groups Pew identified as more likely to use a payday lender. Six of the nine states have among the 10 lowest proportions of their population with a college degree. Five of the nine are among the 10 states with the lowest median income, and only one state is in the top third for median household income.
24/7 Wall St. reviewed the findings of the Pew Charitable Trust’s Safe Small Dollar Loan Research Project, “Who Borrows, Where They Borrow, and Why?” The report surveyed Americans in 2010 to determine the percentage of state residents that had taken out payday loans in the past five years. It also conducted phone interviews with thousands of individuals who reported they had taken out the loans in order to identify the reasons for their use, as well as the borrowers’ experience with them.
Pew also included state regulation governing payday lending based on a report by the National Conference of Legislators, including limits on length of term, size or interest rates on the loan, and any limits on fees. In addition to data provided by Pew, 24/7 Wall St. examined unemployment rates for 2010 from the Bureau of Labor Statistics and income, family type and education attainment (all for 2010) from the U.S. Census Bureau. 24/7 relied on the Center for Responsible Lending for a variety of information on payday loan policies within each state, as well as the number of payday lending storefronts by state.
These are the nine states with the most payday lending.
> Payday loan usage rate: 8%
> Number of payday lending storefronts: 1,800
> Pct. below poverty line: 17.9%
> Median income: $48,615
Like several states that Pew classifies as permissive, payday loans in Texas have a minimum term of seven days — a relatively short period. Without regulation that permits repayment in installments, the loan can be due in full quickly. As a result, the borrower may be unable to pay back the loan, creating a cycle of further debt. The public interest group Texas Appleseed advocates for greater regulation for payday and small-dollar loans. The group argues that “when these high-cost loans compound borrowers’ economic distress, whole communities are impacted.” According to the most recent U.S. Census data, close to 18% of families in Texas live below the poverty level — the fifth-highest percentage of the 32 states studied — making them more susceptible to predatory lending practices by payday lenders.
> Payday loan usage rate: 8%
> Number of payday lending storefronts: 781
> Pct. below poverty line: 19%
> Median income: $40,062
Kentucky attempts to regulate payday loans by limiting the number of loans an individual lender can extend to a customer. Borrowers cannot receive more than two payday loans at the same time from the same lender that together exceed $500. However, information from an electronic database of payday lenders shows that it is failing to adequately protect consumers, according to an editorial in the Lexington Herald-Leader. Despite this, Kentucky’s legislature rejected a bill to cap payday loan interest rates at 36% last year. According to Jason Bailey, Director of the Kentucky Center for Economic Policy, payday lending is a destructive force. In an interview with 24/7 Wall St., he explained that the industry relies on repeat borrowers, and it hurts the ability of families to build assets or become self-sufficient. Among all states for which payday loan usage data are available, Kentucky has the highest percentage of families living below the poverty line, at 19%.
> Payday loan usage rate: 8%
> Number of payday lending storefronts: 413
> Pct. below poverty line: 13.6%
> Median income: $48,257
Payday lending is a big business in Kansas. More than 1 million payday loans were made to Kansas consumers, totaling $432.7 million in 2010, according to an analysis of financial institutions performed by Kansas Legislative Research Department. It is also a growing business. In 1995, only 36 locations offered payday loans. The Center for Responsible Lending counted more than 400 payday lending storefronts in Kansas, and they earned $64.2 million per year in loan fees in 2010.
> Payday loan usage rate: 9%
> Number of payday lending storefronts: 456
> Pct. below poverty line: 15.3%
> Median income: $44,613
Indiana prohibits payday loans of more than $550. The state also requires that lenders limit finance charges on larger loans, so that lenders can only charge up to 15% on the first $250 of a loan, up to 13% on amounts between $250 and $400, and up to 10% on amounts more than $400. Despite these caps, the interest rates remain staggering. According to Pew, fee caps of just 10% of the principal are sufficient to generate an annual percentage rate well in excess of 100%. People without a college degree in the U.S. are 82% more likely to use a payday loan. As of 2010, just 22.7% of Indiana residents had a bachelor’s degree. This was the third-lowest rate among all states for which Pew provided survey results.
> Payday loan usage rate: 10%
> Number of payday lending storefronts: 2,059
> Pct. below poverty line: 18.7%
> Median income: $42,505
Louisiana laws allow lenders to charge up to 567% annual percentage rate (APR) for a two-week $100 payday loan, according to the Center for Responsible Lending. Tim Mathis, policy analyst for the Louisiana Budget Project, explained to 24/7 Wall St. that payday lending undermines many otherwise successful antipoverty programs in Louisiana because most borrowers do not understand the true cost of their loans and use the loans for recurring expenses rather than one-time uses. Among all states for which payday loan data was available, Louisiana had the third-highest percentage of families living below the poverty line, at 18.7%, and of households earning less than $35,000 a year, at 33.3%.
> Payday loan usage rate: 10%
> Number of payday lending storefronts: n/a
> Pct. below poverty line: 15.8%
> Median income: $45,090
In 2008, the state cut the maximum interest rate payday lenders can charge from 391% to 28%. Despite the law, payday lenders found loopholes, and in 2009 the New York Times reported that lenders were charging interest and fees that together amounted to 680% APR. While the Ohio House passed a bill seeking to close loopholes left open by the 2008 law, the bipartisan effort never made it through the Senate. The courts have now taken up the issue. Last year, an Ohio state judge ruled that a second-mortgage lender using a similar fee structure as payday lenders to charge an effective 235% APR had violated the 2008 law that placed a 28% cap on payday loans.
> Payday loan usage rate: 11%
> Number of payday lending storefronts: 729
> Pct. below poverty line: 13.4%
> Median income: $55,631
Washington is tied with Missouri for the second-highest payday loan usage rate, and it is the only state on our list with “hybrid” regulation. Pew classifies Washington as hybrid because borrowers in the state cannot take out more than eight payday loans per year — a form of protection for consumers. WashPIRG, the Washington state Public Interest and Research Group, calls for restricting or regulating payday loans and other short-term small payment loans — when APRs can reach as high as 391% for a two-week $100 loan in the state. According to the Statewide Poverty Action Network, since enacting a law to protect Washington consumers from excessive payday loan charges in 2010, borrowers have saved more than $122 million in fees.
> Payday loan usage rate:11%
> Number of payday lending storefronts: 1,275
> Pct. below poverty line: 15.3%
> Median income: $44,301
The state of Missouri prohibits payday loans above $500 and requires loans to have a minimum term of 14 days and a maximum of 31 days. The state also prohibits lenders from charging a total of more than 75% of the principle in interest and fees on any loan. However, these policies do not protect Missourians who take out payday loans, which can legally be accompanied by an APR as high as 1,955% for a two-week $100 loan, according to the Center for Responsible Lending. Much of the industry’s profits in Missouri, 90% according to Communities Creating Opportunities (CCO), are derived from borrowers who are consistently paying off past debts to avoid default. According to Molly Fleming-Pierre, Policy Director at CCO, after Joplin, Mo., was ravaged by a tornado, payday lenders were among the fastest to arrive at the scene.
> Payday loan usage rate: 13%
> Number of payday lending storefronts: 409
> Pct. below poverty line: 16.9%
> Median income: $42,072
Oklahoma has the highest percentage of residents who have used payday loans in the past five years, according to the Pew Study. Kate Richey, a policy analyst at the Oklahoma Policy Institute, says there are more payday lending storefronts in Oklahoma than the “number of Walmarts, McDonalds, and Quicktrips combined.” In the state, a lender is prohibited from issuing a loan to a borrower with more than two outstanding payday loans. In an interview with 24/7 Wall St., Richey explained that these regulations were intended to protect low- and middle-income households that are targeted by payday lenders who rely on “loan churning” for business as they encourage consumers to take out loans for each of their paychecks.
Michael B. Sauter, Alexander E. M. Hess and Lisa Nelson