Welcome back to this response to the L.A. Times recent attempt to be fair and balanced regarding payday loans. If you missed Part I, here it is. My response to their common hit piece follows without further interruption…
Banks and credit unions are uncomfortable with this competition
For banks, the competition from payday loans is fierce.
They’re fighting for that market share by offering small short-term loans at annual rates as low as 12 percent. Perhaps they will see the folly in offering such a product at such a rate. It is not financially viable, as no fax payday loan companies have found.
Flip it, flip it
The Times reporter cites the belief held by organizations like the CRL that borrowers trap themselves by using an additional lender to pay off their first faxless payday loan (if rollovers are not available). As shown previously, however, most borrowers pay off their loans on time and use very few loans per year, as the above cited CFSA statistics show.
Yet critics blindly persist
CFSA spokesman Steven Schlein is quoted by the Times reporter as saying
Consumer groups are very effective at using that 3- or 4% of horror stories about people who misused the product and got more loans than they can afford. Most payday borrowers earn $25,000 to $50,000 a year. Why would you have a business model to make loans to people who can’t pay you back?
Critics claim that the profit margins for no faxing payday loan companies is outrageous. But according to a Vanderbilt Law/Oxford University co-study from December 2007 at http://www.economics.ox.ac.uk/members/jeremy.tobacman/papers/profitability.pdf, faxless pay day loan companies turn only about 10 percent profit per year due to the risk the small percentage of delinquent borrowers pose.
Consumers have spoken in favor of payday loans
Consumers look to no fax payday loans for the help they require if cash emergencies threaten. Academic and corporate researchers have shown evidence speaking to the value of the loan product. Even independent corporate analysts like Utendahl Capital Partners‘ Daniel O’Sullivan have admitted that
At the end of the day, there is a need for the product, so it comes down to finding something that makes sense for everybody — something the companies can make money at without putting people into a debt spiral.
Speaking of independent parties, is the Center for Responsible Lending (generally faxless payday loans most vocal critic) a party that is merely concerned for the welfare of consumers? Hardly. As you can see, Martin Eakes, who sits on the board of that organization, is also in charge of Self-Help Credit Union, an organization that was in prime position to steal payday loans customer base in North Carolina once the lenders were ceremoniously banned with their own short-term loan products.
One of the founding principles of capitalism is that competition takes place in the market for the benefit of consumers, as they will select the product that fits their needs for the best price. It is apparent that the options offered by banks are not that viable – overdraft fees or credit cards – for a good portion of consumers, that don’t have piles of cash laying around.
Not unusual for the LAT to not have all the facts straight.
Excellent article. Should be required reading.
It’s ridiculous to point the finger at the payday loan industry and blame them for the cycle of debt that seen all across the country. Some people have claimed this to be true. But the truth is, they probably were never responsible with their finances in the first place and took payday loans out knowing first hand that they will not be able to pay it back. To top it off, they go to another lender and do the same thing and eventually default on each loan. Bear in mind that payday loans are designed for short-term usage in emergency situations. If you abuse one of your only privileges to emergency financial assistance, you will create even bigger problems for yourself.