Payday loans helping your credit history is a popular misconception, according to the Urban Institute. So much so, the organization included it in a new fact sheet released Tuesday on credit myths. Rather than using payday loans to try and build good credit, experts say these types of loans should be avoided entirely.
"Payday lenders are sharks," Michelle Singletary, a personal finance expert and columnist, said during the Urban Institute panel discussion on Tuesday. She added payday loans are a "horrible" business model for most people.
The Consumer Financial Protection Bureau found that nearly one in four payday loans are re-borrowed nine times or more, while Pew found it generally takes borrowers roughly five months to pay off the loans and an average of $520 in finance charges.
"It's normal to get caught in a payday loan because that's the only way the business model works," Nick Bourke, director of consumer finance at Pew Charitable Trusts, tells CNBC Make It. "A lender isn't profitable until the customer has renewed or re-borrowed the loan somewhere between four and eight times."
So why are people using these types of loans? "Convenience," says Brenda Palms-Barber, the executive director of Chicago non-profit North Lawndale Employment Network. "The convenience is number one," she remarked on Tuesday's panel.
Across the U.S., there are approximately 23,000 payday lenders, almost twice the number of McDonald's restaurants. For example, in a state like Ohio (which has the highest payday loan APR in the country), there are more than double the number of lenders than there are places to get a Big Mac.