Why are millennials turning to payday loans and pawnshops?

More and more millennials are turning to payday loans and pawnbrokers to get some much-needed cash — steps that can bring immediate relief, but often lead to deeper debt.

It is according to a new study on millennials and financial literacy by the Global Financial Literacy Excellence Center at George Washington University. The study highlights how millennials struggle with their personal finances: Of those surveyed, 42% had used an alternative financial service, a broad term that includes auto title loans, cash advances, tax and rental income with option to buy, during the previous five years. in the study. Payday loans and pawnshops topped the list with 34% of respondents saying they had used them.

Shannon Schuyler, head of corporate responsibility at PricewaterhouseCoopers, which sponsored the report, explained that while some of the study’s findings, such as credit card misuse, were understandable and perhaps even expected, ” it was more difficult to really understand the high increase of things”. such as payday loans and the use of pawnbrokers.

Usually, these services offer a simple, “short-term” solution for those who otherwise could not obtain traditional credit. But loans from these services have a catch, often in the form of extraordinarily high interest rates.

Earlier this month, PBS NewsHour covered the debt trap of payday loans in South Dakota, where there is no cap on interest rates. There, annual interest rates on payday loans are in the triple digits and the industry charges an average of 574%. (To put that into perspective, the average annual credit card interest rate is around 15 percent.) If you took out a $100 payday loan in South Dakota but didn’t make any payments, you’ll end up owing $674 a year. Unable to repay such a loan, most debtors take out another loan to pay first, and so on. This is when a short-term solution can send you into a spiral of long-term debt, leading to fees than the original loan amount.

These alternative financial services have long invaded the windows of the poorest communities, preying on the poor. But now, it’s not just low-income millennials turning to alternative financial services; middle-class millennials and college graduates are too.

So why are more and more millennials from all socioeconomic backgrounds turning to payday loans, pawnshops, and more? ?

One explanation is a lack of financial literacy. According to the study, only 24% of millennials have basic financial literacy: the ability to perform calculations related to interest rates and show an understanding of risk diversification, interest payments on a mortgage and the relationship between interest rates and bond prices.

Financial literacy classes in high school and even earlier, suggests Schuyler, could be helpful. At present, only 17 states require students to take personal finance courses.

Another factor is desperation. According to the study, many, if not most, millennials have no savings to fall back on. Nearly 50% said they couldn’t find $2,000 if they needed it next month. (It’s not just a millennial thing: a Federal Reserve Study showed that only 53% of adult respondents thought they could cover a hypothetical emergency expense costing $400 without selling anything or borrowing money.)

“When you go to a pawn shop, you have to take that product right away because you need that money that day,” Schuyler said.

Helaine Olen, co-author of “The Fact Sheet: Why Personal Finance Doesn’t Have to Be Complicated”, pointed out that the survey did not ask why millennials turn to alternative financial services, but noted that student loan debt likely plays a significant role.

In 2013, 7 in 10 graduates from public and nonprofit colleges had student loan debt on average $28,400 per borrower. Crushed by student loans, millennials face increase in rents and the stagnation of wages too.

“They’re coming in with massive student loan debt, they’re struggling to establish themselves in the workplace, and the starting salaries aren’t what they used to be,” Olen said. “So you’re supposed to do more with less?” How does it work exactly? »

David Weliver, founder of the Money Under 30 Website, echoed Olen’s sentiment. “Even if you don’t have [student loan debt]you’re still competing for less well-paying jobs, and the price of everything but gas goes up.

Plus, Weliver said, a lot of millennials don’t have credit yet. “A lot of people were in their early twenties and in college during the Great Recession and thought they were smart about avoiding credit.” But missing just one student loan payment can have a much bigger impact on your credit score when you have a poor credit history, Weliver said. With zero or poor credit history, payday loans and pawnbrokers may seem like an attractive alternative.

“What I would like to know is how many of them have tried mainstream sources and been turned down,” Olen added.

So what should a millennial in financial difficulty do?

“Make yourself through a year or two of hustle,” Weliver suggested. Get a second job, freelance, sell stuff on eBay. “Not everyone can do it, but if you can, consider it.”

Olen suggests three steps for millennials who want to get their finances in order.

  • Pay off your debt — at the very least, your high-interest debt.
  • Build an emergency fund to cover at least three months of necessary expenses, including food and housing.
  • Start saving for your retirement.

“Start investing,” Olen said. “It’s important. And the more you make it automatic, the easier it will be. Those are really best practices. And I’m not sure how much financial literacy this all requires.

Update: The text incorrectly stated that Shannon Schuyler was a co-author of the report. It has since been updated to say she is responsible for the corporate responsibility of PricewaterhouseCoopers, which sponsored the report.

About Judith J. George

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