Buckeye Institute Debunks Nines Myths About Payday Lending

posted October 23, 2008

COLUMBUS - The Buckeye Institute today released a report debunking nine common myths regarding payday lending.  These myths have received considerable attention during the debate over State Issue 5.  Report authors Dr. Tom Lehman and Marc Kilmer examine many popular criticisms levied against Ohio's payday lending industry, and offer a free-market focused rebuttal.  The full report is available online at http://www.buckeyeinstitute.org/stateissue5.pdf.

"Much like free speech, support for the free market matters little if you only support the ability to sell goods and services you would use," Lehman said. "If you claim to be a supporter of the free market and yet support banning a service with which you personally disagree, your commitment to freedom is not very strong. Conservatives in Ohio who have embraced the ban on payday lending seem to forget this basic fact."

"For those on the left, who traditionally have less respect for the free market, the debate over Issue 5 should also be troubling from a public policy perspective," Kilmer said.  "Good public policy should be based on facts, not anecdotes."

State Issue 5 seeks to repeal legislation that effectively ends payday lending in Ohio.

Following are nine myths debunked in the study:

Myth 1: Payday lenders trap borrowers in a "cycle of debt."
Claim: "Their profits rely on trapping consumers in a vicious cycle of debt..." (Zanesville Times Recorder, September 8, 2008)
Fact: Any "cycle of debt" payday borrowers experience is not caused by payday loans. It is caused by their prior financial situation, a situation from which a payday loan may actually help them escape.

Myth 2: Payday lenders charge 391 percent interest rates.
Claim: "Old Ohio law allowed interest rates as high as 391 percent for a two-week loan." (Cleveland Plain Dealer, September 29, 2008)
Fact: The law allowed loans with rates as high as 15 percent for a two-week loan.

Myth 3: Payday lenders make "obscene" profits.
Claim: "The lenders, when they could charge 391 percent APRs, had been pleased as punch and obscenely profitable." (Cleveland Plain Dealer, October 5, 2008)
Fact: As a percentage of revenues, profit margins for payday lending stores are lower than many other businesses, averaging between 3 percent and 8 percent profitability.

Myth 4: Ohio politicians reformed, not banned, payday lending.
Claim: "We did not ban payday lending, we reformed payday lending." (Governor Ted Strickland, October 12, 2008)
Fact: Lawmakers who passed this law either knew or should have known that limiting payday loans to 28 percent APR means lenders could not make a profit. Thus, it is a ban masquerading as "reform."

Myth 5: The average payday borrower takes out multiple loans.
Claim: "...the typical payday loan customer will take out more than 12 such loans in a given year..." (Ohio Association of Second Harvest Foodbanks)
Fact: It is difficult to tell how many loans the average customer seeks and obtains due to lack of good data.

Myth 6: Payday lending "strips" money from the community.
Claim: "In 2007 alone, payday lenders siphoned over $300 million in fees from Ohio consumers, negatively impacted hundreds of thousands of Ohio families, their communities and the economy at large." (Progress Ohio Blog, September 15, 2008)
Fact: It is a mistake to assume that payday loans impose only costs while failing to consider the benefits received by those who use these loans.

Myth 7: Payday lenders "prey" on their borrowers.
Claim: "We've allowed a small group of lenders to enslave, essentially, in a debt way, our most vulnerable population, those that are poor and those who can't make ends meet." (Cleveland Plain Dealer, October 9, 2008)
Fact: Payday lenders are like any other business - they provide a product that consumers freely buy.

Myth 8: Payday lenders charge usurious rates, which are condemned in the Bible.
Claim: "Payday lending is modern-day usury." (Ohio Association of Second Harvest Foodbanks)
Fact: In the Bible, "usury" means the charging of any interest, not just "excessive" interest.

Myth 9: Consumers will be better off without payday loans.
Claim: "The lenders and their trumped-up poll chose to ignore the fact that preventing Ohioans from getting ripped off and trapped in debt would be a help to the state's economy." (Cleveland Plain Dealer, May 14, 2008)
Fact: Credible research shows that consumers are worse off where payday loans have been banned.

Dr. Tom Lehman is a Buckeye Institute adjunct scholar and an associate professor of economics at Indiana Wesleyan University. He has extensively researched the payday loan industry. Marc Kilmer is a Buckeye Institute policy analyst and author of several studies focusing on economic freedom.

The Buckeye Institute for Public Policy Solutions is a nonpartisan research and educational institute devoted to individual liberty, economic freedom, personal responsibility and limited government in Ohio.