Mythbusters: Payday Lending Version

Last year I analyzed four myths about payday lending that the Pew Charitable Trust’s “Payday Lending in America” project was able to disprove, in the first iteration of their study on borrowers. Their newest report “How Borrowers Choose and Repay Payday Loans: Payday Lending in America” goes into more depth, revealing a love-hate relationship between borrowers and high-cost, short term loans. The report tells a conflicting story of dependence, need, stress, relief, and any other emotion associated with finances that you could think of. Borrowing from the Mythbusters theme again, here’s the skinny on Pew’s new report.

(Editor’s Note: David wrote a blog post, when the first PEW report on PayDay loans came out last year.  For those who are interested in seeing how he dissects the fundamental myths behind PayDay loans, you can go here to check it out.  It’s worth the click)

Myth 1: Payday loans are mostly paid back.

Truth: There is some ‘truthiness’ going on here. Pew’s recent study finds that borrowers renew their loans or take out back-to-back loans in order to prevent defaulting. Only 14 percent of payday borrowers can repay their loans from a monthly budget. At some point, most borrowers inevitably default, require a cash infusion from family or friends, or use a tax refund (1 in 6) to pay off their loan debts.

Myth 2: Payday lending is an alternative for overdraft fees from checking accounts.

Truth: More than ¼ quarter of borrowers stated that payday loans caused their overdraft fees. The loan and overdraft fees are not mutually exclusive.

Myth 3: Borrowers think the terms are fair.

Truth: Again, there is some degree of truthiness about this. It is less about fairness but more so about ease of access, desperation, and perceptions. Some 55 percent of borrowers reported that loans take advantage of borrowers. What’s more, perhaps the most revealing finding is that 37 percent would borrow on any terms.

When people get desperate, it’s no surprise that they’ll do desperate things. The overall challenge with payday lending is that families lack income and assets to support themselves. As one borrower remarked, this relationship between borrower and loans is sweet and sour. Sweet when there is some immediate relief; but sour after the loan is made. Payday loans turn out to be a real problem for most customers, but the root here isn’t these terrible products. The root of the problem is the inability to earn income, set aside assets and build financially secure households. Fighting off the worst terms of the worst products is just a delaying measure until we can fix the structures and systems that aren’t serving the American people very well.

 Posted by: David Rothstein