Americans Paying Dearly for Payday Loans

NEW YORK (TheStreet) -- Ready for another toxic byproduct of the weak U.S. economy?

Consider the payday loan market, where cash-strapped Americans are using loans in ways that dig an even deeper financial hole than the hole that caused them to turn to payday loans in desperation in the first place.

A disturbing study from the Pew Charitable Trust shows that Americans spend about $7.4 billion annually on payday loans, and pay an average $520 in interest each year.

That's a pretty depressing fact alone, but it gets worse.

According to Pew's "Payday Lending In America: Who Borrows, Where They Borrow, and Why," Americans are no longer using payday loans for emergencies, like for a needed medical expenditure, or to replace a driving belt on their car so they can get to work safely, and on time.

Instead, Americans are paying those inflated interest rates on pay day loans to pay for everyday needs, like groceries and utilities.

"Payday loans are marketed as two-week credit products for temporary needs," says Nick Bourke, project director for Pew's Safe Small-Dollar Loan Research Project. "In truth, average consumers are in debt for five months and are using the funds for ongoing, ordinary expenses - not for unexpected emergencies."

The study notes that way too many payday loan consumers are incurring high interest rates just to pay off an everyday bill.

"69% of first-time borrowers needed funds for recurring expenses, such as utilities, credit card bills, or rent or mortgage payments," the study reports. "Only 16% sought money for unexpected expenses, such as a medical emergency. If payday loans were not available to them, 81% of borrowers reported they would cut back on other expenses instead."

Pew also took a long look at exactly who is using payday loans. The demographic that most uses payday loans are employed white females, 25 to 44 years old.

Drilling down even deeper, Pew finds these demographics among consumers who use payday loans most "disproportionately":

A new trend, not surprising in the digital age, is how many consumes are going online to get a payday loan.