Myth vs. Reality

CFSA helps separate fact from fiction with a straightforward and honest examination of a payday advance and the short-term lending industry.


Payday advances are two-week loans—not annual loans. Industry critics often cite payday advances as having a “391 percent annual percentage rate” which is misleading. The typical fee charged by payday lenders is $15 per $100 borrowed, or a simple 15 percent for a two-week duration. The only way to reach the triple digit APR is to roll the two-week loan over 26 times (a full year). State laws and industry best practices simply do not allow this to happen. Many states do not even allow one rollover. In states that do permit rollovers, CFSA members limit rollovers to four or the state limit—whichever is less.

Even if APR were an accurate representation of the fees associated with a payday advance, the figure pales in comparison to the realistic alternatives considered by consumers.

  • $100 payday advance with a $15 fee = 391% APR  

  • $100 bounced check with $56 Non-Sufficient Funds & merchant fees = 1,449% APR

  • $100 credit card balance with a $37 late fee = 965% APR  

  • $100 utility bill with $46 late/reconnect fees = 1,203% APR


Numerous studies corroborate a public policy analysis from Clemson University that concludes, “There is no statistical evidence to support the ‘cycle of debt’ argument often used in passing legislation against payday lending.”

A 2010 survey by the American Payroll Association found that 71.6 percent of American employees are living paycheck to paycheck, a situation in which a family may be unable to absorb unexpected expenses without short-term loans. The vast majority of Americans, undeniably, use payday advances responsibly and, as intended, for short-term use. State regulator reports and public company filings confirms that more than 90 percent of payday advances are repaid when due and more than 95 percent are ultimately collected.  

States’ law and CFSA Best Practices limit the number of times a customer can be in a loan. In most of the 32 states that allow payday lending, rollovers or loan extensions are either limited or prohibited. In states without limits, CFSA members limit the number of rollovers to four. Should a customer of a CFSA member company have difficulty paying back a loan when due, for whatever reason, he or she may enter into an Extended Payment Plan, a provision of the CFSA's Best Practices, that allows the loan to be repaid over a period of additional weeks. This option is provided to customers for any reason and at no additional cost to the borrower.


While critics of the industry assign labels to payday advance customers in an attempt to further their political agenda, the fact is that CFSA members provide services to a broad cross section of Americans because there is widespread demand. Just like Home Depot and Costco, payday advance stores are located in population centers that are convenient for where customers live, work, and shop.

Increasingly, banks and credit unions are not serving the financial needs of communities. In an effort to identify and quantify the extent to which insured banks outreach, serve, and meet the banking needs of unbanked and underbanked households, a 2009 FDIC survey looked at the basic banking and other financial services currently offered. The survey found that while banks are aware of significant unbanked and underbanked populations in their market areas, the efforts to serve those customers have been minimal. According to the survey, “73 percent of banks are aware that significant unbanked and/or underbanked populations are in their market areas, but less than 18 percent of banks identify expanding services to unbanked and/or underbanked individuals as a priority in their business strategy.[1]”  

Payday advance customers are typical hardworking adults who may not have savings or disposable income to use as a safety net when unexpected expenses occur. Importantly, an analysis of consumers’ use of payday loans found that 88 percent of customers were satisfied with their last advance.

Here are the facts:

  • 41 percent of payday loan customers earn between $25,000 and $50,000 annually; 39 percent report incomes of $40,000 or more;
  • 53 percent are under 45 years of age; 63 percent have children at home; only 9 percent are 65 or older;  
  • 90 percent have a high school diploma or better, with 54 percent having some college or a degree;
  • 85 percent use other forms of credit; 54 percent have major credit cards;
  • 100 percent have steady incomes and active checking accounts, both of which are required to receive a payday loan or advance.[2]

[1]FDIC Survey of Banks' Efforts to Serve the Unbanked and Underbanked: Executive Summary of Survey Findings and Recommendations, February, 2009 - PDF

[2] George Washington University School of Business, Gregory Elliehausen. An Analysis of Consumers’ Use of Payday Loans; January 2009.


Our industry operates currently in 32 states and CFSA is working to be regulated on all 50 states. While the industry does not want to be regulated out of business (as industry critics would like), it has always supported responsible and balanced regulations that protect consumers, while preserving their right to financial options and access to credit.

Over the past decade, most states have created or maintained a regulatory environment that satisfies the robust consumer demand for small dollar, short-term loans. Working with CFSA, state policymakers have balanced the interests of the industry with substantive consumer protections that ensure responsible and informed use of the product. As a result, millions of satisfied consumers have enjoyed the convenience and economic benefits of payday advance services without complaint. In fact, a 2009 analysis of consumers’ use of payday loans found that 88 percent were satisfied with their last loan.


Small dollar, short-term loans are expensive to originate and maintain, which is one reason most banks no longer offer the product. A 1999 Federal Reserve Report found that, regardless the size of a loan, it cost banks $174 to originate a loan application. An article published in the Fordham Journal of Corporate & Financial Law concludes that payday lending fees do not deliver high profits to lenders and supports the position that payday advance fees are in line with the high costs of operating a payday loan business. In fact, on average, the nation’s five publicly traded payday lending companies earn a 6.6 percent profit on their income. A September 2009 independent analysis by Ernst & Young, LLP found that “on a pre-tax and pre-interest basis, multi-line payday advance lenders earn an average profit of $1.37 per $100 of loan principal issued – that represents a modest margin of 9.1 percent, before taxes.

Industry critics fail to recognize that, in addition to the cost of administering the loan, payday lenders incur the normal overhead costs of running a business. The fact is that the pricing structure of for-profit payday lending is reasonable and justified based on the costs to deliver the service. A proof point of this is that Goodwill, a nonprofit, tax-exempt charity offers payday loans, charges customers $9.90 per $100 borrowed (252 percent APR) for their “Good Money” payday loan. And this is only to break even. For-profit payday lenders typically charge an average of $15 per $100 borrowed while also paying taxes, employee salaries and health care, rent, and overhead costs.


All reputable payday lenders have underwriting criteria, in addition to the requirements of a steady income and checking account. Ninety-five percent of payday loans are repaid when due, a fact confirmed by numerous state regulatory reports. It simply would not make good business sense to loan money to people who can't pay it back.

Under CFSA’s Best Practices, a customer who cannot pay back a loan when due has the option of entering into an Extended Payment Plan, allowing the loan to be repaid over a period of additional weeks. This option is provided to customers for any reason and at no additional cost to the borrower.


CFSA member companies are committed to collecting past due accounts in a professional, fair, and lawful manner. In accordance with CFSA’s Best Practices, member companies may not pursue criminal prosecution against a customer as a result of the customer’s check being returned unpaid. If it becomes necessary and is appropriate, however, companies may turn the account over to a collection agency.

If a member company is thought to be in violation of the Best Practices, a customer should contact CFSA at 888-572-9329 or


Strong consumer demand and changing conditions in the financial services marketplace fueled early growth of the payday advance industry. The recent economic downturn, however, including an increase in unemployment rates, means that while demand for short-term credit is on the rise, it does not translate to more money advanced as borrowers may not qualify. According to an analyst with Stephens Inc., an independent financial services research firm, “the industry has been suffering in the financial crisis. While you may think that in tougher times people are more inclined to borrow, these companies are not seeing any kind of growth.”


A payday advance is one of the most transparent loan products in the financial services marketplace with a clear and understandable fee structure. An analysis of consumers’ use found that 95 percent of payday loan customers said they were aware of the fee associated with the loan. The average cost is very simply $15-$17 per $100 borrowed for a short-term, typically two-week loan. Unlike some alternatives, there is no application fee or additional cost, no hidden charges, balloon payments, or accruing interest. The cost of a payday advance is fully disclosed to customers on signs in the stores and in disclosure agreements and the terms of the loan are clearly outlined in the lending agreement, in accordance with the Truth in Lending Act (TILA). CFSA members also provide an educational brochure emphasizing responsible use of the product. And, a customer that decides the loan is not needed can, within 24 hours, simply return the borrowed amount to the lender and no interest will be charged.


While they claim to represent the best interest of the consumer, anti-payday lending activists seek to limit the already small number of short-term credit options available and tighten consumer access to credit. Anti-payday lending activists do not represent the views of millions of people who use payday advances responsibly and are glad to have somewhere to turn when they need quick access to credit and find alternatives more expensive.

Research shows that many people who bounce checks and use overdraft protection often do so at a higher frequency than the rate at which customers use payday loans and at greater cost. For example, a 2008 FDIC study reports that a bank customer repaying a $66 check overdraft (the average bounced check) in two weeks would incur a 1,067 percent APR. [FDIC Study of Bank Overdraft Program,” Federal Deposit Insurance Corporation, November 2008]. Based on the reasons customers choose payday advances, limiting their use would, in most cases, drive them to more expensive and less desirable alternatives that they had previously tried to avoid.

If there were widespread discontent, policymakers would surely here from the 19 million U.S. households that use a payday advance from time to time.


A 2009 FDIC National Survey of Unbanked and Underbanked Households found that 43 million U.S. adults live in households that, although they have bank accounts, occasionally choose to use alternative financial services when it meets their needs. Taking away choices and access to credit does not help consumers. Customers deserve options and do not want others making financial choices for them. Anti-business activists should not be in a position to determine what is right or wrong for hard-working Americans. So-called consumer groups and activists working to ban the payday advance industry do not represent the vast majority of consumers who work hard to make ends meet. Consumers don’t like the idea of people who have probably never been short of cash dictating where they can or cannot borrow money. If critics are successful in regulating the industry out of business, consumers will be forced to turn to more expensive forms of credit, including offshore Internet lenders. At the end of the day, consumers benefit when given a variety of options and trusted to make financial decisions based on what’s best for them and their families.


An overwhelming majority of customers use a payday loan or advance to meet an unexpected expense. Nearly half said that they considered another source of credit, including a bank, credit union, and/or credit card before obtaining a payday advance. [George Washington University School of Business, Gregory Elliehausen. “An Analysis of Consumers’ Use of Payday Loans,” January 2009]

When an immediate, short-term need arises, CFSA member companies are there to help. A payday advance, however, is not a long-term solution for ongoing budget management. Chronic use can lead to financial hardship. If you find yourself repeatedly falling short between paydays, it may be time to consider long-term credit solutions or credit counseling.

To obtain credit counseling services, contact the National Foundation for Credit Counseling. The NFCC is a national network of nonprofit Financial Care Centers dedicated to helping people learn how to budget and use credit wisely. Call 800.388.2227 to find a center near you.


A 2010 study concluded that lack of access to payday loans would likely cause customers substantial cost and personal difficulty, such as bounced checks, disconnected utilities, or lack of funds for emergencies such as medical expenses or car repairs. In addition, deprivation of access to credit [payday loans] could cause substantial economic and personal harm if it forces the consumer to go without the means to meet necessary expenses such as medical care, car repairs, living expenses, rent, or work-related expenses such as transportation or appropriate work clothing Research from the University of Chicago found that the existence of payday lenders significantly offset the increase in foreclosures in times of natural (and potentially personal) disaster. And in fact, a 2007 study found that payday advances may actually help consumers avoid bankruptcy. In states where payday loans were banned, consumers filed for Chapter 7 (no asset) bankruptcy at a higher rate. .


Efforts by industry critics to blame the payday advance industry for contributing to the recent financial crisis is far from the truth. While other financial institutions required billions of dollars in government bailouts, the payday advance industry remained committed to providing credit to our millions of hard-working customers while assuming all of the risk. Unlike a mortgage loan that doesn’t perform, a payday lender has no collateral to call on these small, transparent transactions, and assumes any loss on the balance sheet with zero impact on the taxpayer. In addition, the average payday loan of $345 is a substantially less financial obligation than the average mortgage of $225,000 and the average credit card balance of more than $7,000. Suffice it to say, payday loans had no impact on the financial crisis.


According to FDIC Chairman Sheila C. Bair, “There is a tremendous demand for small dollar unsecured loans.” However, most of the "alternatives" are completely different products with different terms and different fee structures than payday loans. Many come with a variety of restrictions and complicated fee structures. As the GAO recently reported: "Recent statutory and regulatory changes and FDIC initiatives may encourage more institutions to offer small-dollar loan alternatives to payday loans or expand their availability, but many consumers may still chose to use payday loans for their wide availability and relative lack of eligibility."

To date, almost all of the attempts to create payday loan alternatives have either been charity-based, required government subsidies, unavailable to the general public, unprofitable, or unsustainable.

In fact, an FDIC two-year pilot program encouraged banks to offer small-dollar loans comparable to payday loans reported few banks participating. After the initial pilot program reporting period, a number of participating banks eliminated the payday advance alternative.

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Did You Know...

that the typical fee for a $100 payday advance is cheaper than fees charged for bouncing $100 check?

Connecting With Our Communities

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