Payday Loan Myths Debunked: Listen Up, Ohio!

Read this and learn the unbiased truth about a payday loan, Ohio voters.

The Buckeye Institute For Public Policy Solutions, a self-described “nonpartisan research and educational institute devoted to individual liberty, economic freedom, personal responsibility and limited government in Ohio” has weighed in on nine important myths about payday lending. May the analysis of Dr. Tom Lehman and Marc Kilmer make your ballot choice over Issue 5 easier to come by.

Here are the nine myths they tackle, with a little bit of commentary:

1. Payday lenders trap borrowers in a “cycle of debt” – To think clearly on this matter, it is necessary to understand that it is not a fast payday loan that cause borrowers’ financial problems. Almost universally, it is their pre-existing financial problems that cause them to take a loan. In many cases, that loan can help them get out of the hole they’re in.
2. Payday lenders charge 391% interest rates – This is a very common misconception. A Payday advance loan is a two-week loan with anywhere from a typical 15 to 30 percentage rate. 391 percent is an annual percentage rate, which works for mortgages and car loans, but payday advance loans are not annual loans.
3. Payday lenders make “obscene” profits – Lehman and Kilmer show that “as a percentage of revenues, profit margins for payday lending stores are lower than many other businesses, averaging between three and eight percent profitability.” Sure, that’s a profit, but it’s hardly obscene. Payday lenders are businesses, and in order to stay in business, there must be some profit.
4. Ohio politicians reformed, no banned, payday lending – What would you call capping rates at 28% APR? That’s profit of only $1.07 per $100 loans for a two-week loan. Does that sound like enough to support a business to you?
5. The average borrower takes out multiple loans – Evidence here is inconclusive. The methodological error critics generally seem to make is what Lehman and Kilmer call “ecological fallacy.” Essentially, “studies erroneously argue that growth in the number of payday loan lenders and/or growth in number of loans per storefront ipso facto causes loan customers to fall into a debt trap. There is no evidence to suggest this is the case.
6. Payday lending “strips” money from the community – There is an exchange of services going on here, people. There is a cost to the consumer, but they are receiving the benefit of the loan. No critic has stepped forward with a cost-benefit analysis that proves this claim.
7. Payday lenders “prey” on their borrowers – It should be clear that fast payday loan businesses are like any other legitimate business. They provide a product consumers freely buy. Moreover, in a voluntary economic transaction, “predator” and “prey” are not apt terms. Free will and choice are involved. If anything, with an average borrower default rate in the industry of around 20 percent, “predatory” borrowers tend to victimize lenders.
8. Payday lenders charge usurious rates, which are condemned in the Bible – America was founded on the separation of church and state, so let’s not play the pre-Revolutionary Church of England card here. Read Thomas Jefferson’s writings and you’ll find this fact to be unavoidable. Keep religion out of government and public policy. Besides, scriptures cited are always Old Testament, and with the coming of Jesus, didn’t he say “I am the end of the law.” Mosaic law is antiquated.
9. Consumers will be better off without payday loans – Solid evidence indicates people are worse off once loans are banned than before. See this Federal Reserve Bank study, paying particular attention to pages 20 and 26 re. North Carolina and Georgia and returned check rates.

Lehman and Kilmer’s report is clear, well-reasoned and well-supported. It’s the kind of thing Ohio voters truly need to make an informed decision about how they’ll vote on Issue 5 and the payday loan issue.