The U.S. Middle Class Got Addicted to Payday Loans

A few years ago, the microfinance business was in decline, regulators put up barriers, online stores disappeared, and investors fled en masse from the largest companies in the industry.

Today, many subprime loan operators are promoting online installment loans with much longer repayment periods, but at the same time with high interest rates. While payday loans are often used by consumers with low incomes, the new form of loan is aimed at Americans with an average income facing stagnating wages and delinquent utility bills.

In just five years, online installment loans have gone from a relatively niche offering to a thriving industry. Now, according to TransUnion, the debt of non-first-class borrowers totals about $50 billion. In the process, the landscape of access to loans for a significant part of the country’s population is being transformed. Moreover, industry participants managed to achieve all this without a harsh reaction from regulators, in contrast to the microfinance segment.

“Installment loans are a moneymaker for lenders, but at the same time they are very expensive for borrowers,” said Margot Sanders, senior adviser at the National Center for Legal Assistance to Clients.

The evolution of subprime lending

For many families facing rising costs and stagnant wages, this form of lending is a way out. According to the US Census Bureau, over the past ten years, median household income has increased by about 15% to $46,000. And this is not only below the 20% increase recorded for a wide range of products. The key costs that play the most important role in the budgets of the middle class have increased much more massively: housing prices have skyrocketed by 26%, medical care has risen by 33%, and education has become more expensive by as much as 45%.

To survive in these conditions, the Americans moved in the direction of loans. Unsecured private loans, including home purchases, cars, credit card use, and student loans, have all grown in unison. Many payday loan lenders, hampered by regulatory restrictions and allegations of predatory lending, have seen the growing need for middle-class loans as an opportunity for their renaissance. They said to themselves, “We need to take the time to figure out how to stay in business,” said Lisa Servon, a professor at the University of Pennsylvania who specializes in urban poverty.

New products introduced

And then came online installment loans, aimed at a rapidly growing population with limited access to traditional bank lending. Ranging from $100 to $10,000, they quickly gained such popularity that many providers of alternative loans soon began to make most of their profits from this form of loans.

But these changes have had serious consequences for borrowers. By changing the system of repayment of debts, operators of subprime loans were able to partially bypass the barriers of regulators aimed at preventing the population from being over-indebted with exorbitant commissions.

Payday loans are typically repaid in a lump sum within 31 days. For instance, the average payday loan term in North Carolina is two weeks. Payday loans online NC are one of the most affordable products in the market today. They are preferred by 59% of consumers who need fast cash for a short period. About 16% of adult residents of North Carolina have used online payday lending in the first half of 2022. Most inquiries were submitted through Their popularity is due to instant funding, a purely online process, and no credit score requirement.  The extensive network of licensed lenders allows consumers to find the right loan provider for unique needs.

In states like North Carolina and Virginia, interest rate caps designed to protect borrowers a few years ago only applied to payday loans up to $2,500. In the second quarter, the average installment loans were $2,123, compared to $420 for short-term products.

Installment loan terms typically range from 4 to 60 months, facilitating the accumulation of larger debts by individuals.

“The advantage of installment loans is that they have longer repayment periods, and the disadvantage is that they only pay interest initially, and this period can take up to 18 months,” said Sanders of the National Center for Legal Assistance to Clients.

In turn, industry participants argue that, as in the case of payday loans, high interest rates are required here due to the high risk of default by consumers. By the way, in the first half of the year, the volume of write-offs on loans in installments amounted to about 12%, while in the credit card segment this figure reached 3.6%.

“By charging high borrowing costs, lenders are providing their services to clients who do not have access to other forms of lending and are therefore already in trouble,” said John Heckt, an analyst at Jefferies LLC.

Growth of online payday lending among students

“Before applying for online payday loans, people are very likely to go through various trials, whether it’s an expensive medical treatment or losing a job, which, in turn, deprives them of access to other forms of loans,” explained financial analysts. They also found out that African Americans were more likely to have a payday loan than Whites (40% to 20%) and a higher incidence of having a late payment (58% to 34%). This research arm analyzes the lending behavior and habits of unbanked or underbanked consumers. The thing is that sixty million Americans do not have access to traditional loans. The annual income of an ordinary borrower is about 52 thousand dollars. Of these, 80% are students, and 30% own real estate. More than 10% of the company’s core customer base earn more than $100,000 a year.

Lending boom

The growing popularity of online installment loans, coupled with improved opportunities to use big data to better understand customers, has helped improve the lot of many subprime lenders.

In the five years, the average payday loan provider’s annual profits were up about 1,000%, while the average installment loan provider’s profits increased 46% to $1.1 billion in the same period, according to Bloomberg.

Subprime installment loans are now pegged to securities for sale to bond investors, giving insurers an even lower cost of capital and broadening the investor base.

The lion’s share of the growth in this segment is due to the middle class. About 45% of borrowers brought in more than $400,000 in annual income last year, according to Experian’s study, based on an analysis of more than 350 million consumer loan applications and 25 million loans made during that period. For 15% of borrowers, income varies from 50 to 60 thousand dollars, and for 13% – more than 60 thousand.

Tiffany Poole, who specializes in bankruptcies, notes that initially the applications came from the lower class, but now the middle class and even richer sections of the population have begun to appear, and loan sizes are only growing.