More millennials are turning to payday loans and pawn shops for much needed cash – moves that can provide immediate relief, but often result in deeper debt.

That’s according to a new study on millennials and financial literacy by the Global Financial Literacy Excellence Center at George Washington University. The study highlights just how much millennials struggle with personal finance: of those surveyed, 42 percent had used an alternative financial service, a broad term that includes auto title loans, tax refund advances and rent-to-own products, in the five years prior to the study. Payday loans and pawnshops led the list with 34 percent of respondents reporting having used them.

Shannon Schuyler, a corporate responsibility leader of PricewaterhouseCoopers, which sponsored the report, explained that while some findings in the study, like the misuse of credit cards, were understandable and perhaps even expected, it was harder to really understand the elevated rise in things like payday loans and pawn shop usage.

Usually, such services offer an easy, short-term fix to those who wouldn’t otherwise be able to get traditional credit. But the loans from these services come with a catch – often in the form of extraordinarily high interest rates.

Earlier this month, PBS NewsHour covered the debt trap of payday loans in South Dakota, where there’s no cap on interest rates. There, the annual interest rates on payday loans are in the triple digits, and the industry charges an average of 574 percent. (To put that in perspective, the average annual interest rate for credit cards is around 15 percent.) If you took out a $100 payday loan in South Dakota, but made no payments, you’d end up owing $674 in a year. Unable to pay off such a loan, most debtors take out another loan to pay for the first, and so on. That’s when a short-term fix can throw you into a long-term debt spiral, resulting in even greater charges than the original loan amount.

Such alternative financial services have long riddled the storefronts of poorer communities, preying on guaranteedinstallmentloans.com/payday-loans-va the poor. But now, it’s not just low-income millennials who are turning to alternative financial services; middle-class, college-educated millennials are as well.

One explanation is a lack of financial literacy. According to the study, a mere 24 percent of millennials demonstrate basic financial knowledge: the ability to do calculations related to interest rates and show an understanding of risk diversification, interest payments on a mortgage and the relationship between interest rates and bond prices.

Financial literacy classes in high school and even earlier, Schuyler suggests, could be helpful. Right now, only 17 states require students take classes in personal finance.

Another factor is desperation. According to the study, many if not most millennials don’t have savings to fall back on. Nearly 50 percent said they wouldn’t be able to come up with $2,000 if they needed it in the next month. (That’s not just a millennial thing: a Federal Reserve study showed only 53 percent of adult respondents thought they could cover a hypothetical emergency expense costing $400 without selling something or borrowing money.)

When you go to a pawn shop, you need to take that product in immediately, because you need that cash that day, Schuyler said.

Helaine Olen, co-author of The Index Card: Why Personal Finance Doesn’t Have to Be Complicated, pointed out that the survey did not ask why millennials are turning to alternative financial services, but noted that student loan debt likely plays a large role.

In 2013, 7 in 10 graduates of public and nonprofit colleges had student-loan debt averaging $28,400 per borrower. Crushed by student loans, millennials are facing rising rents and stagnant wages too.

They’re coming in with massive student loan debt, they’re having a horrific time getting a foothold in the workplace and starting salaries aren’t what they once were, said Olen. So you’re supposed to do more with less? How exactly does that work?

David Weliver, founder of the Money Under 30 website, echoed Olen’s sentiment. Even if you don’t have [student loan debt], you’re still competing for fewer well-paying jobs, and the price of everything, except for gas, is going up.

Plus, Weliver said, a lot of millennials don’t have credit yet. A lot of people were in their early 20s and in college during the Great Recession and thought they were being smart by avoiding credit. But missing a single student loan payment can have a much greater impact on your credit score when you have little credit history, Weliver said. With no or poor credit history, payday loans and pawn shops may look like an attractive alternative.

Why are millennials turning to payday loans and pawn shops?

What I would love to know is how many of them tried traditional sources and got turned down, Olen added.

Put yourself through a year or two of hustle, Weliver suggested. Get a second job, do freelancing, sell stuff on eBay. Not everyone can do it, but if you can, consider it.

• Pay down your debt – at the very least, your high-interest debt.

• Save up an emergency fund covering at least three months of necessary expenses, including food and housing.
• Start saving for retirement.

Start investing, Olen said. It’s important. And the more automatic you make it, the easier it’s going to be. Those are really the best practices. And I’m not sure how much financial literacy that all requires.

Update: The text incorrectly stated that Shannon Schuyler was a co-author of the report. It has since been updated to reflect that she is a corporate responsibility leader of PricewaterhouseCoopers, which sponsored the report.

Left: Millenials surveyed in a new study reveal that 42 percent had used an alternative financial service, such as an auto title loan or tax refund advance. Photo by Suzanne Plunkett/Reuters

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