More Payday Lending Falsehoods
Tuesday, August 19th, 2008 By Marc KilmerThe debate about payday lending has been notable for the anti-lending forces as well as those in the press (am I being redundant?) fail to grasp basic facts about the payday loan industry. I have documented that repeatedly on this blog. It seems that I have more work to do, however, based on today’s editorial in the Dayton Daily News. Let me just comment on a few of the more egregious departures from reality the editors make:
There are alternatives to payday lenders. Credit unions, for instance, and even some banks will make short-term loans for much more reasonable rates.
Really? Then why do people choose payday lenders who, in the view of these editors, rip them off? Are these consumers idiots? Well, no, since the notion that credit unions or banks are going to be making high-risk, unsecured loans at low rates to a large number of people is ridiculous. It isn’t happening now and it won’t happen when the ban goes into effect. The fact is that these high rates are necessary to provide the product that borrowers want and need.
After Sept. 1, short-term loans simply would be capped at 28 percent on an annualized basis, versus the 391 percent that can be charged now. Borrowers would pay $18 for a two-week $300 loan, not $45.
No. A 28% APR on a two-week, $300 loan is $3.23. Would you loan money to someone for that low of a rate? Would you make a profit if you did?
But when lawmakers looked into the payday businesses’ practices, they found that many customers were being encouraged to take out loan after loan because high fees were trapping them in debt.
That sounds like lawmakers actually did a study of the issue and discovered the borrowing patterns of those who take these loans. That didn’t happen. They heard from a handful of people who needed a payday loan at the time but, in retrospect, didn’t like the price they paid. But these borrowers agreed to pay the price at that time, indicating that the viewed it then as a fair price. Furthermore, there was no evidence that people were being encouraged to take out more than one loan. The plural of anecdote isn’t data.
Yes, there was a “study” from the mis-named Center for Responsible Lending that tried to show that lenders sucker people in to a “debt trap.” In his testimony to the General Assembly, Dr. Tom Lehman discussed the flaws of this study:
…the researcher would ideally need sample data on actual payday loan consumers, and would need to show that payday loan users are more likely to experience debt traps than non-payday loan users, and that traps are caused by the presence of payday loans while controlling for alternative explanations for the indebtedness cycle (such as customer character, capacity for loan repayment, amount of collateral, if any, borrower credit score, and various demographic characteristics such as gender, age, and race or ethnicity).
This hypothesis would be extremely difficult to support even if one had access to all the necessary and detailed data on individual borrowers, and even if the researcher utilized a robust econometric technique, such as that based upon multiple regression analysis. Indeed, Hanson and Morgan (2005) attempted an approach vaguely similar to this (although without data on individual payday loan customers), and could not support the hypothesis that payday lending was predatory. The two research reports by payday loan critics in Ohio contain no data that even begin to approach this level of detail. Specifically, the studies do not contain data on individual borrowers. Yet, their conclusions confidently claim to have demonstrated the presence of debt cycles and predatory lending caused by repeat payday borrowing in the state of Ohio. In my view, their conclusions are not supported by the research data they muster, and their research methods are highly suspect or altogether wrong.
Tags: Economic Freedom, Free Enterprise, Liberty, Politics, Regulation
August 19th, 2008 at 3:52 pm
“The plural of anecdote isn’t data.”
I love it.
But you’re mistaken, Marc. If you have a bank account, banks will be happy to make a short term, high interest loan to you. If you write two checks overdraft, they’ll charge you anywhere from $15 to $40 for each one, and give you a day or two even to make it up.
Math is a little hard for me, as it is for our legislators, but maybe we can ask the ballot board what that interest rate is.
August 20th, 2008 at 10:52 am
This is simply about preserving financial choices and the ability for ADULTS to make them based on their individual needs and situation.
I am sooooo tired of hearing the misleading garbage that the critics of the Payday Industry keep harping on…. a 2 WEEK loan is not 391%, there is no cycle of debt created for the MAJORITY of those that use pay day loans, 6000 jobs that have benefits & pay well will be ELIMINATED… these are facts!!
I really think the Ohio General Assembly should be a little more concerned about our growing budget deficit, high foreclosure rate, increasing unemployment, and companies leaving the state and job losses in the THOUSANDS.
August 20th, 2008 at 11:31 am
Marc, AMEN to you for finally posting a blog worth reading –with FACTS not gossip.
Thought you might find some information interesting…
Bill Faith made accusations that Payday lenders PAID homeless people for their petition signatures in Late June–however Payday lenders didnt start the petition until July 12th– sniff sniff, thats FISHY
Lets do the math here You borrow $100, you pay $15 for that 100 dollars and pay it back. APR 15%
Opposing Representatives that probably failed their first year of algebra, and didnt make it to trigonometry think the following.
$100 borrowed ONCE for a year
$15 paid every two weeks (26 times) for that ONE LOAN (390$ over one year)
100/390=390%APR
That WOULD be 391% APR, however, the theory of a customer only borrowing the $100 once is ILLEGAL. The state of Ohio doesnt allow “roll-overs”. Roll-overs are defined as letting a customer borrow an amount of money for 2 weeks, and if they cannot pay it back, paying the fee to extend the loan another two weeks. ILLEGAL, see Ohio Revised Code 1315.
So the true math is defined as below:
$100 borrowed every two weeks = 2600
$15 paid to borrow every two weeks = 390
390/2600 = 15% APR
“OH–So THATS how you do APR…hmmm Well, as representatives, we would rather give the annual term to ONE two week loan, but in theory have the customer pay the loan fee every two weeks because it makes the APR look outrageous.” Who cares if its a lie?
Politicians, they are the predatory lenders. Lending inaccurate information on their platform of lies to GAIN VOTES.
Thanks Marc for your truthful exposure.
August 20th, 2008 at 1:40 pm
Ohioans should make their voice heard to:
Protect 6,000 good-paying jobs with benefits
Protect your financial freedom and private financial choices
Protect your right to privacy about personal finances.
August 20th, 2008 at 2:51 pm
Hey mike, do you realize that when someone bounces a check, the bank doesn’t always cover it. The check also is usually presented twice and the vendor also charges a $30+ fee. Also, if it isn’t covered immediately, it gets turned over to a collection agency. Banks also will close your bank account down if they see a consistant pattern of floating checks. Did you also know that it is illegal to write a check knowing that there are no funds to cover it? Your option really doesn’t sound so good to me.
August 22nd, 2008 at 2:32 pm
Why has this issue even gotten this far? Shouldn’t a person be allowed to make a financial decision without goverment interference? The decision to walk into a payday loan company is not taken lightly by someone in need of money on a short term basis. This would not be a frivilous choice, it would be a true need.
When the law goes into effect in September, where will people go to get money for something like medicine for a sick child, or money to keep their utilities on? Do the people making these laws live in the real world? It may be hard to believe, but people really are having a hard time making ends meet. Without the payday loan resource that currently exists, where will they go?
People are trusted to make choices everyday, why should someone be permitted to take this choice away?