What Do People Use Payday Loans For?

Payday loans are a type of short-term, high-interest finance. They are designed for the emergency expenses that may arise from paycheque to paycheque and should only be used for emergencies. However, there is no official ruling about what payday loans can be used for and many borrowers use them for regular payments.

What Is a Payday Loan?

A payday loan is a form of short-term financing (usually between 2-4 weeks) designed to help out borrowers who are in a financial jam. This is unlike the likes of secured loan options which use a high value asset (usually a property) to secure the loan against, and acting as collateral should the borrower default on their payments.

For those who do not have savings or a rainy day fund, it can be difficult to know what to do when unexpected expenses occur before their next payday. This is where payday loans come in, as they allow individuals to borrow a small amount of money to cover their emergency expenses and tide them over until their next paycheque.

According to Fund Ourselves, payday loans are often used as an option for those who have bad credit as they provide immediate access to funds and have less strict lending criteria than many traditional lenders. 

However, payday loans are notorious for their high interest rates, making them difficult to repay. It is always advised that individuals use this type of loan with caution to avoid getting themselves further into debt.

What Are They Used For?

The purpose of a payday loan is for any emergency situation that might arise between paydays that has not been accounted for. This could be anything from a home or car repair, to an emergency medical expense. These loans in the UK are also tightly regulated by the Financial Conduct Authority (FCA) and thus, there are stringent application criteria to adhere to.

In some cases, for example where a company director of sole trader needs a small cash injection into their business, particularly when expanding and upgrading technical systems and software like a VoIP phone system or digital financial infrastructure, they may opt for a payday loan to get them the fast cash they need. However, as a payday loan is a personal loan it will need to be taken out by the individual concerned and not the business as a business loan would be.

For individuals who are living from paycheque to paycheque , it is very common that they rely on payday loans to cover their essential expenses such as rent, utilities or groceries. However, this can perpetuate debt problems and be incredibly dangerous.

According to payday loan data, these loans are commonly used to cover car payment, pay off credit card bills, pay for utilities, cover rent or mortgage payment or even cover grocery bills.

With 58% of payday loan borrowers struggling to meet their monthly expenses, it is easy to see how individuals can quickly accrue debt by taking out these high-interest loans to cover their essential costs.

Who Uses Payday Loans?

Payday loans are widely used with around twelve million Americans relying on this form of financing every year. In the last five years, around 6% of Americans have used payday loans. However, there are certain demographics who are more likely to use payday loans than others.

Some of the key demographic factors impacting the likelihood of taking out a payday loan include those who rent their homes (57% more likely), low-income individuals (62% more likely), those who lack university-level education (82% more likely) and African Americans (105% more likely).

Younger individuals tend to be more likely to use payday loans, especially those in their 20s. This age group is most likely to lack stable employment, have mounting debt for student finance, and to rent rather than own their own home.

Ethnic minorities tend to be more dependent on payday loans than white people with African Americans being the ethnic group most likely to take out a payday loan.

Are Payday Loans High Risk? 

If payday loans are used for their true purpose, that is covering emergency payments and repaying them upon receipt of the next paycheque , they can be a good way to gain immediate access to funds and cover unexpected expenses. However, they are rarely used as they should be.

Of those who take out a payday loan, only 14% can repay their loans meaning that ongoing reliance on payday loans is extremely common. In fact, 80% of payday loans are taken out within two weeks of paying off a previous payday loan. Despite certain states limiting payday loan use or implementing stricter legislation, payday loans are still widely used and can cause debt problems if used incorrectly.