Whether they’re advertised with bright storefront signs or hawked by Montel Williams on TV, payday loans have been notorious for their super-high rates. A new study of the industry by The Pew Charitable Trusts is aimed at finding ways to prevent unfair and harmful practices that take advantage of financially vulnerable borrowers.

As part of the Pew Safe Small-Dollar Loans Research Project, the study discovered that the majority of payday loan borrowers did not use short-term loans as intended.

“Payday loans are marketed as two-week credit products for temporary needs,” said Nick Bourke, the project’s director, in a prepared statement. “In truth, average consumers are in debt for five months and using the funds for ongoing ordinary expenses — not for unexpected emergencies.”

The study found that 69 percent of borrowers used payday loans to cover a recurring expense, such as rent, mortgage payments, utilities and food, while 16 percent used them for emergencies.

Many payday loan borrowers would pay a fee, that didn’t go toward the loan principal, just to extend the repayment period — increasing the ultimate cost of the loan.

If payday loans weren’t available, 81 percent of borrowers said they would cut back on expenses. Other alternatives borrowers would consider include: delay bill payments, borrowing from friends and family or selling personal possessions.

State regulations prove to be effective

Pew found that regulation at the state level had a significant impact on the tendency to use payday loans. Certain states impose laws that either do not allow payday lending or have low interest-rate caps that discourage payday lending.

For states that restrict storefront payday lending, 95 percent of would-be borrowers wouldn’t use payday loans, while the remaining 5 percent would turn to online payday lenders.

Only 15 states deploy strategies to prohibit payday lending. Eight states use various controls, such as limits on fees and loan usage or extension of repayment periods, to keep consumer costs in check. However, 28 states allow payday loans of 391 percent and higher.

According to the study, 5.5 percent of American adults, or 12 million people, use payday loans every year. Most payday loans originate in the Midwest and the South. The least came from the Northeast, the regions that also happens to have the most number of restricting states.

Assisting the CFPB

By understanding how consumers use payday loans and how regulations impact their payday lending, Pew aims to identify any areas of the payday-lending industry that can be addressed by the Consumer Financial Protection Bureau.

In January, the CFPB announced plans to examine payday lending with plans to implement a supervision program and work at the federal and state level to keep a close watch for any misconduct against the financial well-being of consumers.

Pew has been successful in raising awareness of non-transparency when it comes to checking-account fees — convincing major banks to adopt simplified fee-disclosure forms.

The organization’s research on payday lending may bring about similar results.

“These findings raise serious concerns about payday lending, including whether a two-week product with an APR typically around 400 percent is a viable solution for people dealing with a chronic cash shortage,” Pew said in the report.

This is just the beginning of an ongoing project that may transform how consumers interact with payday loans in the future.

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