The global economy has become increasingly complex and volatile in recent decades. Inequality of income continues to increase. Meanwhile, companies are finding new ways to make money. Financial "products" abound, including those targeting people who can not obtain other types of credit.
This oversupply has helped boost the phenomenal growth of consumer loans in the short term over the last 20 years. Offered by companies rather than banks, payday loans are specifically offered to people who do not make ends meet.
Industry representatives say that pay-type services bring economic benefits to all types of borrowers and address an unmet need ignored by traditional lenders. No traditional credit checks and no collateral are required to obtain these single payment loans for relatively small amounts.
Critics argue that such companies are predatory, taking advantage of people nowhere to turn to financial solutions. And indeed, some authorities have adopted a regulation. An example is the United Kingdom. Rollovers (renewal of a single payment loan) have been limited and fees capped in the hope of making payday loans cheaper and safer. When expressed as an annual percentage, payday loan fees can represent interest from 300 to 1,000%.
Whatever point of view we stand for, the rapid growth of the payday industry undeniably demonstrates strong consumer demand.
A mystery profile
So who are the people who take these loans at high cost? The United States has seen a lot of research on the subject. Many investigations and interpretations have been done by industry, universities and non-profit organizations. However, identifying who are the payday borrowers is an ongoing case that has given rise to conflicting claims.
In addition, online loans are a rapidly growing component of the global small-scale credit industry. Other factors – such as the boom in the local housing market or the resource industry's accidents – are clouding efforts to establish a borrower profile.
A recent large-scale analysis by the US non-profit MDRC has once again confirmed that internationally recognized studies are the only definite feature of a payday borrower. People who take short-term, high-cost loans have a steady income, but that income is not enough to make ends meet.
Debt smaller but steeper
By earning and owning less, and less likely to obtain standard forms of credit, the average borrower has a total indebtedness lower than one who does not use payday loans.
However, monthly payments of a payday borrower's debt are more likely to be high interest and to eat more of their income. A study sponsored by the US industry in 2007 acknowledged that nearly one-third of payday borrowers face monthly debt payments that take up 30% + of their income. Another 12.9% had to pay between 20% and 29% of the monthly household income.
Such debt service levels would likely prevent clients from obtaining additional credit from traditional lenders. This leaves nearly half of the payday lenders at risk of refinancing this debt and paying other fees. Even worse, they might need to turn to another / other payday lenders for additional payday loans.