Why Young Women Are More Likely To Take Out Loans

Julia Novakovich  |

The media regularly talks about payday loans – also called cash advance loans, post-dated check loans, and more – and why they’re such a risky proposition, but the average consumer may not understand how these loans really work. In general, a customer applies for a loan – generally without a credit check – and gets a certain amount of cash.

They write a post-dated check for the full amount of the loan, plus a finance fee. At the end of the loan term – usually less than two weeks – the company can either deposit the post-dated check, or the customer can write a new post-dated check for a new, higher amount. By the time the customer finally pays off the loan, they may owe 400% interest, or more.

Who Uses Payday Loans?

According to Finder, payday loans are most likely to be used by those who:

  • Have bad credit.
  • Have lower income.
  • Are younger (between 25 and 49 years old).
  • Are parents.
  • Are divorced or separated.

Several of these factors mean that young women are more likely to take out payday loans than young men.

Why Do Young Women Use Payday Loans?

The vast majority of people using payday loans are using them to pay for:

  • Housing;
  • Food;
  • Recurring bills.

Few people use these types of loans to pay for emergencies or special purchases. This may be due to a higher dollar value for those items. Payday loans are usually for smaller amounts of money.

According to Pew Research, the most common payday loan borrowers are white women between 25 and 44 years old. Common advice suggests that these borrowers should instead borrow from friends and family, work more, or get a traditional loan. These suggestions ignore several factors, however, which specifically affect young white women, and which impact non-white women even more significantly.

  • Borrowing from friends and family. According to the University of Georgia, many payday loan users don’t have friends or family they can borrow from. Those around them may be struggling just as much as they are. After all, a significant number of people relying on payday loans may be on social assistance such as TANF or SNAP.
  • Work more. Young women in particular may struggle to find sufficient work, especially if they have children. Only 17% of sole custodial parents in the United States are men. If women are divorced or separated and have children, they are very likely to be raising their kids on their own. With the cost of daycare, women with young children in particular may struggle to find work. If they took time off work to care for children, they may also have a hard time finding a new job. Also, while women make up 47% of the overall workforce in the United States, 76% of the low wage workforce is made up of women. The suggestion to simply work more is absolutely naïve.
  • Get a traditional loan. If the payday loan were being used for a large one-time purchase, or for a special purpose, this would make more sense. But payday loans are often used for small amounts and for recurring costs – rent, food, and recurring bills. Regular loans aren’t useful for these purposes. Those who need payday loans also tend to have bad credit; this means that a traditional financial institution is less likely to be willing to give them a loan anyway.

How To Get Out of the Payday Loan Trap

Payday loans usually cost 400% annual interest and these interest rates may fluctuate widely from state to state. While some of the traditional suggestions to help women need fewer payday loans and avoid their exorbitant fees are naïve, there are societal level changes that could help change this trend.

For example, most women support additional regulation of the payday loan industry through the Consumer Finance Protection Bureau. Right now, regulations are primarily managed state by state. The CFPB ruled last year that these companies must ensure that a customer can repay the debt in a single payment before making the loan, but that doesn’t solve the problems that cause young women to need these loans in the first place.

Pushing for policy updates that improve the overall state of women will do the most to reduce the overall need for payday loans. Policies like guaranteed sick time, affordable child care, and increased minimum wages would help women maintain a higher standard of living. Stabilizing the way child support is paid would help single parents get the necessary funds to care for their children. Job training and pushing companies to hire more diversely can help women get better jobs overall. And making sure that social safety net programs maintain more than poverty level existence can help those who need assistance get back on their feet.

Evidence across the economic spectrum shows that when women are able to achieve a better financial existence, the entirety of society benefits from the change. This is particularly true for children, who are better able to thrive in a more secure financial environment.

DISCLOSURE: No financial interest

The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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