New Data on Payday Advance Customers

The Credit Research Center (CRC) at Georgetown University's McDonough School of Business recently released the first comprehensive analysis of consumer demand for and use of payday advance loan products. Payday advance products allow customers to get, for a fee, a small amount of cash for a short period of time against their next paycheck.

"Our study shows that payday advance satisfies an unfulfilled demand for very small, short-term credit in today's market," said Dr. Gregory Elliehausen, senior research scholar at CRC and co-author of the study. "The industry emerged in the 1990s to serve a void created by the withdrawal of traditional lenders from the very small loan market. And, I think many people will be surprised by some of the findings regarding the customer's characteristics, their use of and satisfaction with this product."

For example, payday advance customers for the most part do not have profiles similar to the typical fringe banking customer. Payday advance customers typically have higher incomes and higher levels of education. "Payday advance customers have characteristics similar to consumers who have strong demand for traditional consumer credit products," said Elliehausen. More than half of payday advance customers report annual incomes between $25,000 and $50,000 and three out of four have a high school diploma or some college education.

Payday advance customers are overwhelmingly young, one and two parent families in the early life cycle stages when they have not yet reached their peak earning years nor accumulated large amounts of liquid assets. Two-thirds of payday advance customers are under 45 years of age. Only one in ten payday advance customers is age 55 or older while three in ten of all American adults are over 55. Two-thirds of payday advance customers have children under age 18.

The Georgetown study reveals why consumers choose a payday advance. About 66 percent of most recent new advances were used to cover an unexpected expense or a temporary reduction in income, while 34 percent were used for planned expenses or other discretionary uses. Fifty-nine percent of customers who considered other sources of credit chose payday advances because of the quick and easy process, the fast approval and limited paperwork. Nine percent cited privacy as their reason and that the advance is not included in one's credit history. Only six percent said they had no other credit option.

The study found that most customers used payday advances infrequently or moderately and at different times over the past year. More than a third of customers used either 1-2 advances or 3-4 advances over the past 12 months. About half of customers had advances outstanding less than a total of three months. "A small percentage of customers had payday advance credit outstanding for a very long time, however, and may have had few alternatives to payday advances," said Elliehausen. "Nonetheless, the favorable attitudes toward payday advances and the high level of satisfaction with the most recent transaction suggests that for many customers, continued use of payday advance credit was a choice, not a burden." Consistent with this observation is the attitude expressed by customers disagreeing with the government limiting the number of times a consumer can obtain payday advances during the year or the number of times an advance can be renewed without a break.

Customers expressed very favorable attitudes toward payday advance companies, with 92 percent agreeing that they provide a useful service, about 10 percentage points greater than the percentage of customers who viewed credit in general as beneficial. "The overwhelmingly favorable response to this statement strongly suggests that payday advance companies serve a real economic need for their customers," said Elliehausen. Just over 75 percent of customers were satisfied with their most recent payday advance transaction. Of the 12 percent who were dissatisfied, most cited high cost as the reason. Only 3.9 and 1.9 percent cited insufficient or unclear information and difficulty in getting out of debt, respectively, as the reason.

Payday advance customers are generally aware of the cost of such credit. Ninety six percent reported a finance charge for their most recent advance. Seventy-eight percent recalled receiving information on the annual percentage rate, although most couldn't recall the rate itself. Many customers recognize that payday advance credit is costly. While about half consider the cost of payday advances to be the same or less than fees for returned checks or late payments, large percentages had perceptions that the cost was greater. "The study suggests that some may have used payday advance credit to avoid returned checks or late fees in spite of the higher cost," said Elliehausen.

Nearly all payday advance customers also use other types of consumer credit. Sixty-two percent use bank or retail cards and 79 percent use closed-end consumer credit. Payday advance users may have difficulty obtaining additional credit from traditional creditors, especially on an unsecured basis. The payday advances may give these consumers a little control over their financial situation that they otherwise would not have, which may explain their positive attitudes toward the product and relatively high levels of satisfaction.