Payday loans only delay trouble

Conclusions reached in the North Carolina Commissioner of Banks’ survey to determine how consumers fared without the option of payday loans do not match the actual findings. Nor do they represent the experiences of the hundreds of thousands of North Carolinians who used payday advances to address short-term credit needs.

The majority of people surveyed had never used a payday loan or even experienced a financial hardship in the previous three years. Because they never used or needed the product in the first place, it’s logical that they did not miss it when it was gone.

Only 23 of the 401 surveyed were former payday loan customers. Of those, only five said that prohibiting payday lending has had a positive effect on their household.

In fact, the survey demonstrates a strong demand for credit to cover small, unexpected expenses between paydays. Many consumers don’t have savings, friends, family or a church from which to borrow. The elimination of payday loans in North Carolina did nothing about the demand and forced consumers to substitute payday loans with costly, less desirable and even dangerous options.

When asked how they handled their most recent financial crisis, the most frequent response was “did not pay/paid the expense late.” Other telling responses included “bounced checks/used overdraft” and “used a credit card/cash advance.” Considering the fees of those products can be double that of a payday loan, a payday loan may have been a better option for those consumers.

According to the survey, of those who chose not to pay a bill, sixty percent faced costly or damaging consequences. Ten percent said they “had utilities disconnected, went without a prescription medication, or had a damaged credit rating.” The remaining fifty percent incurred late fees and charges, with some respondents saying their “bill was turned over to a collection agency or that they faced repossession or bankruptcy.” The option of a payday loan could have prevented these negative outcomes.

Hard-working, middle-class Americans sometimes fall short of cash between paydays. The authors of this report suggest they are better off paying higher fees for late bill payments and bounced checks or damaging their credit. We believe consumers are better served when given a variety of regulated options and trusted to make decisions about what financial products work best for their families.

While you are correct that of the 401 people surveyed for the study only 23 were former payday loan users, and only 5 (22.7%) said that prohibiting payday loans had a positive effect on their household compared to the 2 (9.1%) who stated it had an negative effect on their household, 15 (68.2%) said that prohibiting payday lending had no effect. Which is to say that payday loans were not missed and when they were more often than not prohibiting corporate loan sharks from taking advantage of people in need had a positive effect on the household.

I agree that consumers are better served when given a variety of regulated options and trusted to make decisions about what financial products work best for their families. The problem is consumers are not given a wide variety of regulated options. Nor is payday lending strongly or vigorously regulated, with internet payday lenders being among some of least regulated and worst abusers. Too often payday lenders push the limits or outright skirt the law. Many states, including Minnesota, have some prohibition against serial loans, but the majority of borrowers, including those in Minnesota, rollover a loan multiple times, thereby draining away much needed funds and only delaying the problem.

Instead of spinning I would like CFSA to acknowledge this high rollover rate. Acknowledge that the high rollover rate is counter to the supposed “short-term” that payday loans are supposedly for.

I would also like the CFSA to address the morality of charging unconscionably high interest rates to people, especially when in reality, because they have a regular job and a checking account they aren’t really as high a risk as the are made out.

Why isn’t 36% interest enough?

Instead of offering abusive and exploitive loan products how about actually offering products that really would help communities.

If the borrowers were not high risk, they would already have credit available on a credit card, home equity line of credit, or at a credit union. If these were low risk loans, then all the big banks would offer these transactions, or lower the cost of bounced check coverage. 36% is not enough for a bank holding a consumer’s checking account, it certainly isn’t enough for a third party financial institution holding a post-dated check. 36% is less then a utility company will charge to restart service.

If any business can provide cash advances to high risk consumers at lower rates then payday companies, then those new businesses should try to compete in the market. Price fixing and usury limits do not have the intended effect of forcing legal lenders to lower their fees. Instead, legislating price caps simply forces legal lenders to stop offering loans to certain consumers. If legislation caps the fees on short term loans or bounced check fees, then lenders and banks simply stop offering credit to a large segment of the market. This is not a solution, as persons living paycheck to paycheck will resort to “unregulated” lenders. Prohibition failed in other arenas, driving people to unscrupulous providers, and the same occurs when legislators outlaw payday loans. Typically, when states eliminate payday lending, the consumers turn to unregulated foreign based Internet payday lenders.

See the following article from the Federal Reserve Board regarding How Households Fare after Payday Credit Bans, for more information: http://www.newyorkfed.org/research/staff_reports/sr309.html.

It would be far better to regulate and monitor short term loans, and to find ways to encourage competition, then to simply legislate these consumers into the hands of unregulated, offshore Internet lenders.

[...] Comment on Paydayloansonly delay trouble by Community Financial… [...]

To address your question on the 36% APR…to apply an 36% annual rate to a two-week loan payday loan would mean that the maximum a lender could charge per $100 for two weeks is $1.38. That, frankly, is not enough to keep the lights on, let alone pay employees.

To put it in perspective, Prospera Credit Union and the Goodwill, a non-profit, tax-exempt charity, is offering paydya loans where they charge customers almost $10 per $100 borrowed (i.e., 252% APR) for their “Good Money” payday loan. For-profit payday lenders charge an average of $15 per $100 borrowed while also paying taxes, employee salaries and health care, rent and overhead costs. The $5 more they need to break even, pay taxes, make a profit and keep their businesses running makes sense for borrowers, employees and the tax coffers

Customers use payday loans to cover small, unexpected expenses between paydays. They are people who have a bill to pay today, but don’t get paid for another week. Customers choose between bouncing a check or paying overdraft fees, late bill payment penalties or credit card late fees, often asking family for money or pledging personal possessions as collateral.

When you consider the fees, it makes sense. $100 payday advance= $15; overdraft protection= $29; late fee on credit card bill= $37; $100 off-shore internet payday loan= $25; bounced check and NSF/Merchant fee= $55.* *Source: http://www.cfsa.net/cost_comparison.html

[...] loans only delay trouble by JBHO Published in February 6th, 2008 Posted by admin in Uncategorized Comment on Payday loans only delay trouble by JBHO If the borrowers were not high risk, they would already have credit available on a credit card, [...]

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The fact that Goodwill does payday loans doesn’t make it alright. That it does them at $9.90/$100 to cover costs, means that $5.10 of the $15/100 that the average payday lender charges is profit. Goodwill/Prospera has to pay for employee salaries and health care, rent and overhead costs etc Granted they aren’t paying income taxes, so less $1.99 in taxes at the highest corporate tax rate of 39%, so that means $3.10/100 in profit.

Also while I don’t have any hard evidence, my experience is that your argument that a payday loan helps borrowers avoid other more costly penalties doesn’t match reality. This goes back to the fact that the majority of borrowers roll over the loan on average 8-13 times. During this time they have all the same financial problems they had when they borrowed the money plus the extra cost of the loan. On the limited paycheck-to-paycheck budget that got them into the problem they now have even less room to cope with shocks and end up paying late fees, overdraft fees etc. while they are trying to scrape together the extra $35-40 to roll over the loan yet again. Thus they didn’t really avoid any fees, just delayed them.

Thanks for the great post. I am new to your blog and I really like what I see. I look forward to your future work.

The reality is that the payday lending industry is strongly regulated in addition to there being a trade association which promotes and encourages industry best practices. The absence of a 36% cap on interest is not indicative of low regulation or no regulation, it just means that the industry is not overregulated. Unfortunately, statistics can be manipulated to reflect anyone’s interest or point of view. Asking consumers to comment on a service that they have never used will definitely shade the results of any study, not to mention that the study was initiated by an already biased source.

Whiners! Oh, my situation is too grim so I have to complain against the institution that helped me originally. Get over yourself! I have been in dire situations where I have had to use payday loans and I have had to roll them over a few times, but the bottom line is that they got me out of a pickle. Yes, they are a business so they are there to make money, but it is a great service that they provide. You get an unexpected bill, like a medical bill, and you are able to get them off your back by getting a simple, and quick few hundred dollars. The payday loan places have saved you. If you are not able to pay them back right away, then you need to work on your money management and stop blaming everyone else for your shortcomings! I have used this service several times in my life, and I have never had a problem. Medical bills are the main reason people are in debt in this country, we should focus our efforts on that problem and stop picking on the little payday advance stores.

These people who get stuck in the cycle of debt are not very smart. They get one loan to pay off another one, why not just skip the payment? The law in California says that payday lenders can only charge another $15 on a loan that is not paid. That is still a better deal than bouncing a check! If you decide to skip payment on your payday loan, the store will call you, all you have to do is make payment arrangements with them and get the original loan paid off, when you pay it off, they will gladly give you another loan. Taking out a loan to pay off a loan is just like Kiting money, which is illegal. I have used payday loans for years now, and because of them I am out of debt and my credit score is climbing. They provide a great service and I think we need to stop blaming them for other people’s stupidity.

[...] wemedia wrote an interesting post today onHere’s a quick excerptThey get one loan to pay off another one, why not just skip the payment? The law in California says that payday lenders can only charge another $15 on a loan that is not paid. That is still a better deal than bouncing a check! … [...]

The payday lobby is out for only one thing: to protect their ability to charge higher interest rates and their profits. They are deceiving Ohio voters into supporting their issue: http://www.youtube.com/watch?v=zDoeXujagE4

We need to end predatory payday lending in Ohio!

VOTE YES ON ISSUE 5!

Oh for the Love of Pete people— stop suggesting that Adults can’t make their own decisions. I am sooooo tired of people passing the buck and blaming others for their situation in life. Adults are capable of making their own decisions, related to finances, work, etc.

And John, show me a company that is NOT in business to make a profit— hint — THEY ALL ARE!! Every single company that exists wants to turn a profit. And to claim Payday Lenders want more profit than others… ummmm where do you get those “facts”? It’s not true!