More millennials are turning to payday loans and pawn shops for the cash they need so badly – steps that can provide immediate relief, but often result in greater debt.
That’s according to a new study on millennials and financial literacy from the Global Financial Literacy Excellence Center at George Washington University. The study highlights how millennials struggle with personal finance: Among those polled, 42% of those polled had used an alternative financial service, a broad term that includes auto title loans, cash advances. tax refund and rental products with option to purchase, within the previous five years. in the study. Payday loans and pawn shops top the list with 34% of respondents saying they have used them.
Shannon Schuyler, head of corporate responsibility at PricewaterhouseCoopers, which sponsored the report, explained that while some of the study’s findings, like the misuse of credit cards, were understandable and perhaps even expected, â it was harder to really understand the high increase in things. like payday loans and the use of pawn shops.
Usually, these services offer a simple, âshort-termâ solution to those who otherwise could not obtain traditional credit. But the loans of these services have a problem, often in the form of extraordinarily high interest rates.
Earlier this month, PBS NewsHour covered the payday loan debt trap in South Dakota, where there is no cap on interest rates. There, annual interest rates on payday loans are triple digits, and the industry charges an average of 574%. (To put it in perspective, the average annual credit card interest rate is around 15%.) If you took out a $ 100 payday loan in South Dakota, but didn’t make any payment, you will end up owing $ 674 in a year. Unable to repay such a loan, most debtors take out another loan to pay off the first one, and so on. This is when a short-term solution can plunge you into a long-term debt spiral, costing you even higher fees than the original loan amount.
These alternative financial services have long riddled the storefronts of the poorest communities, preying on the poor. But now it’s not just low-income millennials who are turning to alternative financial services; so are middle-class and college-educated millennials.
So why are more and more millennials from all socio-economic backgrounds turning to payday loans, pawn shops, etc.
One explanation is a lack of financial literacy. According to the study, just 24% of millennials have basic financial literacy: the ability to perform calculations related to interest rates and show an understanding of risk diversification, mortgage interest payments and the relationship between interest rates and bond prices.
Financial literacy classes in high school and even earlier, suggests Schuyler, could help. Currently, 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. Almost 50 percent said they wouldn’t be able to 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 something or borrowing money. money.)
âWhen you go to a pawnshop, you have to take this product immediately, because you need that money that day,â Schuyler said.
Helaine Olen, co-author of “The Index Card: Why Personal Finance Doesn’t Have to Be Complicated,” said the survey did not ask why millennials are turning to alternative financial services, but noted that debt student loans probably play a big role.
In 2013, 7 in 10 public and nonprofit college graduates had student loan debt of an average of $ 28,400 per borrower. Crushed by student loans, millennials also face rising rents and stagnant wages.
âThey come in with massive student loan debts, they’re going through a horrible time gaining a foothold in the workplace, and starting salaries aren’t what they once were,â Olen said. “So are you supposed to do more with less?” How exactly does it work? “
David Weliver, founder of the Money Under 30 website, echoed Olen’s sentiment. “Even if you don’t [student loan debt], you’re still competing for fewer well-paying jobs, and the price of everything except gasoline is going 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 a single student loan payment can have a much bigger impact on your credit score when you have little credit history, Weliver said. With no credit history or bad credit history, payday loans and pawn shops may seem like an attractive alternative.
âWhat I would like to know is how many of them tried traditional sources and were turned down,â Olen added.
So what should a struggling millennial do?
âTest yourself for a year or two,â Weliver suggested. Find a second job, freelance, sell stuff on eBay. âNot everyone can do it, but if you can, think about 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.
- Save an emergency fund that covers at least three months of necessary expenses, including food and shelter.
- Start saving for retirement.
âStart investing,â Olen said. âThis is important. And the more you make it automatic, the easier it will be. These really are best practices. And I’m not sure how much financial literacy it takes.
Update: The text incorrectly stated that Shannon Schuyler was a co-author of the report. It has since been updated to indicate that she is a corporate responsibility officer for PricewaterhouseCoopers, which sponsored the report.