Mythical Payday Lending Transactions

If you believe in unicorns this article is not for you.

“Payday loans can be used for emergency expenses like car repairs.”

Considering how often this quote is used by advocates of payday lending, one would think that every payday loan was for an emergency.  However, according to Pew’s Payday Lending in America study, only 16% of payday loans are used for emergencies(1).  98 to 99% of these borrowers end up in a cycle of debt (2).

“A payday loan costs less than a bounced check.”

Let’s say someone is going to bounce a $400 check.  According to the Federal Reserve, a bounced check fee averages about $40 to $60 (3). If they go to a payday loan store they can obtain $400 at a cost of $40 for 14 days.  If they repay the loan within 14 days they could save up to $20.  However, statistically the borrower is far more likely to take out 8 payday loans (4) before they have sufficient funds to repay the principle.  The resulting expense is $320, or $260 to $280 more than the bounced check fee.

“Households are worse off without access to payday loans.”

Payday loan advocates often cite a study by the Federal Reserve Bank of New York (5), as well as a study by the Federal Reserve Bank of Kansas City (6), however they fail to mention a study from the University of North Carolina (7) which found that:

  • “Researchers concluded that the absence of storefront payday lending has had no significant impact on the availability of credit for households in North Carolina.”
  • “More than twice as many former payday borrowers reported that the absence of payday lending has had a positive rather than a negative impact effect on their household.”
  • “Payday borrowers gave first-hand accounts of how payday loans are easy to get into but a struggle to get out of.”
  • “Nearly nine out of ten households surveyed think that payday lending is a bad thing.”

They also won’t mention what Alan Greenspan, chairman of the Federal Reserve from 1987-2006 said:

  • “Of concern are abusive lending practices that target specific neighborhoods or vulnerable segments of the population and can result in unaffordable payments, equity stripping and foreclosures.”

“The bank could charge you a $35 overdraft fee for a 99 cent pack of gum, that’s an APR of 1,290,404%”

These types of comparisons are attempts to confuse and obscure the fact that banks charge their fee once.  Payday loan vendors charge their fee every 14 days. (7) Payday loans postpone, and then amplify, the ramifications of a cash shortfall.  Bank fees do not.

(1)  Payday Lending in America, Pew Internet and American Life Project, p. 5

(2) http://www.responsiblelending.org/payday-lending/research-analysis/payday-puts-families-in-the-red-final.pdf

(3) http://www.federalreserve.gov/pubs/bounce/bounce.pdf

(4) Payday Lending in America, Pew Internet and American Life Project, p. 4

(5) http://www.newyorkfed.org/research/staff_reports/sr309.pdf

(6) http://www.kc.frb.org/publicat/econrev/pdf/11q1Edmiston.pdf

(7) http://www.ccc.unc.edu/documents/NC_After_Payday.pdf

(8) http://webserver.rilin.state.ri.us/Statutes/TITLE19/19-14.4/19-14.4-5.1.HTM