Each year, as many as 12 million Americans sign payday loan agreements. With the ubiquity of the internet, short-term loans, especially payday offers, have become accessible like never before. So, who are the typical applicants, and how do they usually spend the borrowed money?
First and foremost, payday loans were devised as a form of emergency financial assistance to individuals who are short of cash. Whether it’s unexpected medical expenses or utility bills demanding urgent payment, such credits enable you to pay your debts quickly, avoiding mounting overdraft fees and penalties. In essence, Internet access and a bank account are all you need to apply, as your identity details are verified remotely. Moreover, eligibility requirements are relatively simple, as no collateral is necessary. So, who are the most typical borrowers?
Naturally, most often, these are citizens with lower income, for whom unexpected costs are difficult to cover. As concerns household income averages, those making less than $40,000 per year (most commonly, $15,000-$25,000) are almost three times more likely to apply. These people often struggle to make ends meet. Due to the simplicity of requirements, they may have little or even zero credit history (borrowing for the first time), and no collateral, which would make securing a conventional long-term credit highly improbable.
Banks tend to view such applicants as risky, refusing to help them cope with difficult circumstances. Payday lenders, on the other hand, may still give these people a chance. Their services make it possible for millions of hard-working citizens to build up or improve borrowing history and resolve financial problems.
The Characteristics of a Borrower
Demographically, urban residents aged 25-49 are said to use payday lending most often. These are active internet users who willingly take advantage of online borrowing. Geographical coverage is linked to local legislation differences since short-term loans are available in some but not all US states. Moreover, state laws determine possible conditions of agreements, capping the maximum interest rate and/or the maximum loan amount, extensions (rollovers), and other charges.
Despite the original idea behind payday loans (short-term cash advance until the next paycheck arrives), some borrowers may use their money for regular expenses, rather than emergency costs. Naturally, with timely repayment, payday loans may indeed be taken out repeatedly. A borrower may even avoid penalties for late payments by asking for an extension, lengthening the term with only service fees accumulating.
However, payday loans are not a universal remedy against financial failure. Any permanent lack of money signals a need for more prudent budgeting and better employment conditions. When cash shortage is constant, borrowed sums may cover credit card bills or even other existing loans. For lenders, the latter is a red flag, making approval of new loans in the future less likely.
However, when payday lending is used sensibly, it serves as a quick, easy and convenient fix for cash shortages. Here, regardless of your income, a payday loan is a wise choice provided that you study your agreement carefully.