High-cost borrowing is a new American norm, research finds

High-cost borrowing through payday loans, pawn shops, auto title loans and others is no longer on the margins of U.S. consumer behavior — about 1 in 4 Americans have tapped this kind of financing, new research shows.

A new study by the National Bureau of Economic Research finds high-cost lending is now firmly rooted in the American financial system after two decades of strong growth.


"High-cost borrowing cannot be considered a 'fringe' behavior that is limited to a specific and small segment of the population," economists Annamaria Lusardi and Carlo de Bassa Scheresberg wrote in their study. "Rather, it is firmly rooted in the American financial system and is common even for households who are generally referred to as 'middle-class families.'"

The new research comes amid a renewed regulatory focus on this type of lending, particularly the payday loan industry. A recent report by the Consumer Financial Protection Bureau found that payday loans were essentially a "debt trap."

The average payday-loan consumer took out 11 loans during a 12-month period, paying a total of $574 in fees -- not including loan principal, according to the study by that federal agency. A quarter of borrowers paid $781 or more in fees.

Separately, consumer advocates backed a state bill this month that would have restricted the number of payday loans to any one borrower. Senate Bill 515, which failed to pass in the California Legislature, would have barred the high-cost, short-term lenders from making more than six loans a year to any single borrower.

The paper by the National Bureau of Economic Research goes beyond the payday loan industry to encompass the entire realm of "alternative financial services." It notes that in 2009 alone, the Federal Deposit Insurance Corp. found this industry to be worth at least $320 billion in transactions.

The paper was based on several separate studies, including phone interviews of close to 1,500 Americans; a state-by-state online survey of about 28,000 American adults; and a military survey of 800 service members.

The study also found that about 34% of young adults have used a payday loan, pawn broker or some other form of high-cost financing. A low level of financial literacy correlated highly to the use of these loan products.