Research Analysis: Payday Advance In America

In May 2001, the Credit Research Center at the McDonough School of Business at Georgetown University released “Payday Advance in America: An Analysis of Customer Demand,” the first-ever, comprehensive economic analysis of consumer demand for and use of payday advance services. Until the release of this study, only anecdotal evidence has been used to discuss the payday advance consumer. The Georgetown study presents the first impartial observation of payday advance in America. Highlights of the analysis include:

Payday advance fees are lower than many of consumers’ alternatives. Bank NSF and merchant fees on a bounced check typically cost more than three times the cost of a $100 payday advance

Payday advance APRs are often lower than customers’ alternatives, even on the same two-week term For example, on a 30-day term, a standard $29 late fee on a $100 credit card payment would have an APR of 771 percent. Similarly, a $100 check with a $25 NSF and a $25 merchant fee would have an APR of 1,303 percent.

PriceWaterhouseCoopers Research

PricewaterhouseCoopers conducted a recent survey that examines the interest rates associated with payday advance, and found that when compared to other types of short-term loans, payday loans are a common sense financial option.

Customers overwhelmingly appreciate payday advance. Ninety-two percent of payday advance customers believe payday advance is a useful service. Over 75% of customers were satisfied with their most recent payday advance transaction and only 12% were dissatisfied.

Payday advance consumers take responsibility for their own financial situations. More than three out of four customers (79%) believe overspending is the responsibility of the consumer, not the lender.

Payday advance customers use the service responsibly. Sixty-six percent of customers use payday advances to pay unexpected expenses or a temporary reduction in income. Thirty-four percent use payday advance for planned expenses or other discretionary uses.

Payday advance customers understand the cost of the service. Ninety-six percent of customers were aware of and reported the finance charge and could compare it with similar fees, including late fees.  

Most customers use payday advance infrequently or moderately. Sixty percent either did not renew payday advance at all in the last year or renewed only 1-2 or 3-4 times. (“Renewals” include both rollovers and new advances taken out on the same day a prior advance was paid in full.)

Most customers fit the expected economic profile of consumers in early life-cycle stages. Forty-two percent own homes and 100% have steady incomes and checking accounts. Only one in ten payday advance customers is 55 or older while seniors represent three out of ten of all adults in America.

Source: The Credit Research Center, McDonough School of Business, Georgetown University, Gregory Elliehausen and Edward C. Lawrence. Payday Advance Credit in America: An Analysis of Customer Demand. April 2001.