Report: Payday Lenders "Churn" Demand For Their Product
Defenders of the payday loan industry often suggest that their
products are valuable because they reach a population systemically
overlooked by the banking sector. In other words, they fulfill the
surging demand for short-term loans in low-income communities. But as
the ...
Defenders of the payday loan industry often suggest that their products are valuable because they reach a population systemically overlooked by the banking sector. In other words, they fulfill the surging demand for short-term loans in low-income communities. But as the legislative fight over payday loan reform advances in Washington and Springfield, it's worth remembering one crucial aspect of the payday loan business model: The industry creates demand for its own products by ensnaring borrowers in unmanageable debt. A new study released this week by the Center for Responsible Lending (CRL) sheds some necessary light on the topic.
According to their research, the fees required to take out an initial high-interest loan "virtually guarantees" that low-income customers will experience a shortfall before their next paycheck. Of course, that necessitates more short-term credit, which means consumers routinely take out additional loans to cover their first. In fact, the authors found that three-quarters of industry's loan volume is generated by "re-borrows." And a staggering 94 percent of customers take out new loans within 30 days of covering their initial expenditure.
CRL put out a video press release explaining their research, which was based (PDF) on the number of days between successive loans made to individual borrowers in Florida and Oklahoma, two states that have databases in which each payday loan transaction is entered. Watch it here:
Comments
If this is the case, why don't you support Rep. Guitierez's legislation to regulate payday loans. Won't this effectively end the "cycle of debt"?
I cringe whenever I see the Center for Responsible Lending “protecting” consumers. The CRL was founded by World Savings/Wachovia owner Herbert Sandler. These banks’ names are etched all over this economic crisis. Yet they still evade justice with the help of the CRL because the CRL frames small-time lenders as big-time evil. In my mind, payday lenders are nothing compared to the mortgage companies that have taken the life savings of untold numbers of American families. The CRL's sole purpose is to take the heat off its founders by placing the blame on payday lenders, which have nothing to do with the hellbound handbasket we're in right now.
Regardless of whether you support or despise payday lending, it looks like change is coming. Change that will probably put many short term lenders out of business. So many states are starting to enact new legislation and eventually I think that we will see something happen on a national level.
CRL is owned by a credit union and therefore has a significant interest in doing away with payday lending, as credit unions stand to gain members, cbounced check fees and a ton of other revenue. Don't believe CRL is independent and looking out for consumers -- they have their own, biased agenda that has nothing to do with helping anyone.
Elitist and self-righteous. Short-term loans can and do save consumers significant amounts of money in bank fees, me included. Groups that want to take away consumer rights are not consumer advocates. They are more interested in dictating behavior. What is next on their agenda? I vote, leave me alone and stop taking away my choices!
GDT, I tend to agree with you. At least it gives people a choice. The alternatives could be worse (loan sharks, etc.)!
Payday lending gets a bad rap. Essentially the argument is that lenders open up a shop in poor areas to prey upon the desperate, but when payday lending as an industry is studied, that isn't the universal case, at all. Think about it this way: payday lenders and pawn shops tend to be located in areas where inhabitants have typically lower credit scores and less access to credit, which is true according to a study by the Federal Reserve, headed by Robin Prager, which is to say that – and listen to this one closely – SUPPLY HAS FOLLOWED DEMAND. Perhaps instead of railing at payday lenders and payday loans, you might try coming up with a solution to poverty you cads.
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