Payday Loans Study Counters Unstudied Media Bias

In the media’s  campaign to educate the public about the supposedly hazardous consequences of relying upon payday loans, truth is the first casualty in the information war.

Yet simple, fact-based (rather than anecdotal) evidence tends to cut to the heart of the matter. Recent studies by Answers, etc., a company that has developed check-cashing and payday advance software for the consumer financial services industry since 1989, presents clear information about payday loans. Their research over the past few years indicate that payday loan costs, the standard customer profile and how the consumer loan products are regulated fall far from the media’s unstudied portrayal.

What do payday loans cost in relation to typical alternatives?

Answer, Etc’s findings indicate that on average, payday loan fees are 2.3 times less expensive than checking overdraft charges. An even greater discrepancy exists when late charges and utility reconnect fees are considered. Banks and credit unions are fond of citing the near 400 percent APR that accompanies a no fax payday loan, but this is misleading. First of all, no payday loan is a 12-month loan; typically they are to be repaid in two weeks. Furthermore, payday loan opponents deliberately neglect to mention that the APR game definitely doesn’t play favorably upon their argument, as you’ll see. These are average examples; frequently the other numbers can make payday loans look like even more of a bargain:

• $100 payday advance – $15 fee, 391 percent APR
• $100 checking overdraft protection – $30 fee, 782 percent APR
• $100 credit card bill with late fee – $29 fee, 756 percent APR
• $100 bill, fee for late/disconnected utility bill – $50 fee, 1,304 percent APR
• $100 bounced check/NSF – $25 fee, 652 percent APR

Interestingly, banks and credit unions are exempted from disclosing their fees for overdraft protection and NSF charges as an APR. Perhaps the above information casts a harsh light on the reason why.

How much do THEIR fees cost?

• Consumers will pay $4.2 billion in ATM service charges in 2006 to withdraw their own money (Bankrate.com Fall 2006 Survey)
• Consumers pay an estimated $22 billion in NSF fees to banks and credit unions (”Contrasting Payday Loans to Bounced Check Fees,” Consumer Credit Research Foundation, Thomas E. Lehman, Ph.D., 2005)
• Banks collect an estimated $10.3 billion annually for overdraft protection services (”Overdraft Fees Can Overwhelm,” Washington Post, June 26, 2005)
• In 2000, consumers paid credit card interest of more than $87 billion (Public Interest Research Group, 2002)
• An estimated $57 billion in late bill payment fees were collected by businesses in 2003, more than 140 percent of the total estimated payday lending volume in the United States (”Sizing NSF-Related Fees,” BAI Banking Strategies Magazine, Bill Stoneman, January-February, 2005)
• Credit card late fee penalties totaled over $11 billion in 2005 (CreditCards.com, November 2006)

Payday loans are regulated to best serve consumers

The “cycle of debt” that the media attributes to payday loans is quite often an impossibility, as few or no loan rollovers are typically allowed. Here are recent restrictions states place on the industry. Any that have changed have only become more strict. They remain among the lowest rates in the country for consumer loans:

• Arizona: 15 percent max fee; $500 max loan; three rollovers
• California 15 percent max fee; $300 max loan; no rollovers
• Colorado: 20 percent max fee on first $300, 7.5 percent on next $200; $500 max loan; one rollover
• Kansas: 15 percent max fee; $500 max loan; no rollovers
• Missouri: 75 percent of loan amount Max Fee; $500 max loan; Up to 6 rollovers;
• Nebraska: 15% Max Fee; $500 max loan; No rollovers;
• Nevada: No Limit; 25% of gross income max loan; None beyond 60 days for original due date;
• Oklahoma: 15% Max Fee up to $300, 10% above $300; $500 max loan, No rollovers
• Oregon: No Limit; Subject to net income max loan; 3 rollovers
• Washington: 15% on the first $500, 10% to $700 max fee; $700 max loan loaned; No rollover.

Portrait of a payday loan customer

• The average payday advance customers earn $40,000 annually
• 68 percent are under 45 years old; only four percent are over 65, compared to 20 percent of the population
• 94 percent have a high school diploma or better, while 58 percent have some college and 19 percent have a college degree
• 41 percent percent own their own homes
• 85 percent have access to other credit, including savings accounts
• 77 percent of the customers were satisfied with their experience
• 92 percent of customers think payday lenders offer a valuable service
• 90 percent of customer are satisfied with their understanding of the terms and conditions of the loan
• 100% have steady incomes and active checking accounts, both of which are required to receive payday loans

(Sources: The Credit Research Center, McDonough School of Business, Georgetown University, Gregory Elliehausen and Edward C. Lawrence; “Payday Advance Credit in America: An Analysis of Customer Demand,” April 2001; Cypress Research Group, “Payday Loan Customer Satisfaction Study,” April 2004)

Payday loans exist because the public supports them

Regardless of media claims, payday loans are a viable form of short-term support when consumers face financial shortfall. Consumers find them to be consistently fast, convenient and discreet. When the simple, most direct data is studied as Answers, etc. has done, the haze of media bias is cleared and real answers become apparent.