The Finance Research Center (FGVcef) at Fundação Getulio Vargas’ Sao Paulo School of Business Administration (FGV EAESP), in partnership with Toluna Insights, recently carried out a survey about payday loans taken out in Brazil in the last two years. To the surprise of the researchers, the survey revealed that just 12% of people resorting to these loans are retired and 15% are over 55.

Another notable finding was that half of borrowers are in full-time employment, so the collateral for the loan is their salary. Still on the subject of collateral, 4% said that the collateral was a welfare benefit such as the Family Grant Program. Of all the participants, 27% claimed to have taken out more than one payday loan in the last 24 months, although this figure was 42.5% among the elderly.

In general, payday loans are relatively small, with 50% of respondents saying they borrowed up to R$3,000. Women typically borrow smaller amounts than men, while people in socioeconomic classes C, D and E borrow more than R$5,000 on average. Most contracts (61%) are short-term, running for under 24 months, while 14% have terms of more than 72 months. These are very long contracts given the relatively small sums involved.

“Payday loans seem to be an advantageous option for borrowers. This is clear when we see that 91% of people are up to date with their repayments, very unlike most other borrowers in Brazil. We can also see that payday loans used to invest in people’s own businesses have much better results than what we see in other statistics. More than 30% of people who took out payday loans to help start a business say they are already reaping rewards. We know that, in general, a very high proportion of new businesses fail. One surprise from the survey, among others, was that the majority of borrowers are not pensioners, as we had believed. We also believed that a large part of the funds went to third parties, mainly relatives. However, we found that most of the funds are used by the borrowers themselves, generally to pay off debts, reflecting Brazilians’ general situation,” says William Eid, the coordinator of the Finance Research Center at FGV EAESP.

Factors leading people to take out payday loans

The characteristics that most attract people to this type of loan are lower interest rates, ease of obtaining loans and speed of receiving funds. The ease of obtaining loans for people with a poor credit score was the fifth most common reason. Men and the elderly (people aged over 55) are more concerned about interest rates, as are members of socioeconomic classes A and B. When choosing a financial institution, 53% took out payday loans from their local bank (35% online and 18% in-person). Only 17% used digital banks. 

Making sure they have enough monthly income left over for other expenses was the main precaution indicated by borrowers, followed by avoiding accumulating other debts. Avoiding scams was the fifth month popular response. Interestingly, consulting a financial advisor came last. Women are more concerned than men about three aspects: not taking up too much of their monthly income, assessing the real need for the loan, and avoiding scams and fraud. The latter factor also stands out among older people as an important precaution.

Among restrictions on this type of loan, the accepted proportion of income was the main one chosen by respondents, followed by installment limits. Most Brazilians would like to be able to borrow more.

The main reasons given for taking out a loan were to pay another debt, buy or renovate a home, pay for medical treatments and settle household bills. Investing in one’s own business was the fifth most popular reason, chosen by 8% of respondents. Women are more likely to take out loans to pay off other debts. Elderly people, as you might expect, are more likely to use loans to pay for medical bills, while young people are more likely to use the money to start or invest in their own business. Regarding people with their own business, almost half said they were just starting out and 31% said they are already making a profit. 

Another surprising finding was that 91% of the sample said they were up to date with their repayments, unlike 70 million other Brazilian borrowers who are in default. In all, 8% have gone to court to challenge their contracts. Younger people clearly face more problems paying off loans, while members of socioeconomic classes D and E are the most likely to be in temporary default.

With regard to possible problems in taking out a payday loan, 55% of people said they did not experience any. The main problems reported were tied selling and harassment by banks and affiliated organizations (mentioned by 21% of people), followed by lack of information, charging different amounts than the borrower had imagined, difficulty in renegotiating loans, undue charges, and fees for renegotiations, which are not allowed. Elderly people are the biggest target of tied selling.

Another question in the survey was about portability. Two-thirds of respondents have used this mechanism to move their loans, mainly to enable lower interest rates and better terms (accounting for 83% of respondents). More than half of respondents said they are very satisfied with their payday loans, while 30% said they are fairly satisfied but complain that making the repayments means having a lower disposable income. In all, 10% think it was a bad deal. The main reason for dissatisfaction is the proportion of monthly income taken up by repayments.

In fact, the proportion of monthly income taken up by repayments is alarming. In total, 46% of respondents are allocating more than 31% of their income to paying off their debts, while 23% are allocating more than 51% of their monthly income to this purpose. There is indeed a large group of over-indebted people in Brazil.