Benefits of Payday Loans Outlined in Yale Study

Payday loans are a form of consumer microcredit that has frequently been misrepresented by the media. It would appear that the incentive behind such shortsighted, vacuous, popgun attacks is being supplied by their financial backers in the finance industry (banks). Banks do not relish the prospect of lost profits to a competitor (”non-traditional” consumer microlending) that more and more consumers in need are finding to be more convenient, faster and versatile.

Thank You for my Financial Success

Recent academic studies of the no fax payday loan industry suggest in a clear, supported manner that the loan product is imminently useful to consumers with less than perfect credit who require short-term budgetary assistance. Dean Karlan of Yale and Jonathan Zinman of Dartmouth recently published a study entitled “Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts” which can be found at http://www.cepr.org/Pubs/new-dps/dplist.asp?dpno=6180. In this study, a strong case is made for not only allowing no fax payday loans, but encouraging expanded offerings of microcredit to all, but particularly those who have been traditionally unserved or underserved by the banking establishment.

Microfinance – born of necessity

Microfinance loans began with the intent of serving consumers who are seeking to build their financial futures. Establishing or improving credit, which is necessary in order to transact with banks, is a primary indicator of financial well-being. By benefiting individuals in this way, short-term payday loans can also be an essential ingredient in regional financial upturn, helping citizens one at a time. Karlan and Zinman found that such loans produced “significant benefits for borrowers across a wide range of economic and well-being,” and hence this form of short-term consumer credit “can be welfare-improving.”

Karlan and Zinman find that expanded access to credit significantly improved average outcomes, and they accomplished this by studying the financial well-being of borrowers for many months after they have used the services of a payday loan.

• During the six to 12 month period, borrowers were “significantly more likely to retain their job” when compared with a control group, and incomes were higher. Households involved in the study, when compared with a control sample, were also less likely to experience hunger, and had more positive views on their financial prospects

• From 15 to 27 months, Karlan and Zinman reported that those without credit established credit scores, and that scores did not decrease due to the use of faxless payday loans

Costs of payday loans didn’t harm consumers

Admittedly, the study did find that the median loan size was about 40 percent of the sample borrower’s gross monthly income.Payday loans in the sample were even taken at the extrapolated annual rate of 200 percent, even though they were not 12-month loans. However, economic downtown was not an observed result of borrowing, and after the six to 12 month period, households were not more likely to take out another loan. This flies in the face of the “cycle of debt” model that is popular in media analysis.

Payday loans are found to be beneficial

“We do not find any evidence that expanding access to consumer credit reduces creditworthiness over a two-year horizon. If anything, the treatment seems to have had a (socially) beneficial impact on creditworthiness by increasing the probability of obtaining a credit score,” write the study authors. “Most importantly, we do not find any evidence that the net effects of expanded access to consumer credit are negative.”

If media outlets looked to sources like Karlan and Zinman, who provide more than anecdotal evidence regarding the worth of payday loans, their stories would be credible. However, then the media would have to report the truth – that the payday loan is not the indicator of financial apocalypse, but a tool for economic betterment.