Professor defends payday loans
University of Kansas
The Payday Loan Reform Act is making its way through Congress, and many have concerns about how it will affect consumers who use payday lenders, online cash advances and other short-term loans.
One such concerned citizen is Robert DeYoung, a finance professor at University of Kansas. He wrote an opinion piece that was published Tuesday in the Wall Street Journal.
Myth busting
In his piece, DeYoung talks about the misconception that payday loan customers are uninformed and that payday lenders take advantage of this. He debunks the conception by citing A January 2009 study by Gregory Elliehausen at George Washington University. DeYoung writes:
The study found that payday borrowers make informed choices. About half of the 1,173 payday borrowers he surveyed considered other credit alternatives — such as bank, credit card, or personal loans — before taking out a payday loan.
Mainly mainstream
DeYoung also cites another study that reports the average payday loan customer is young, married, has a high-school education, a bank account and a major credit card.
So why would a person with a bank account and a credit card need a payday loan? This brings me to the bad alternatives to payday loans
Nonsufficient Funds
Anyone who has ever bounced a check knows it is expensive. Overdraft fees and NSF fees can be more than triple the fees on a payday loan. So many informed, intelligent consumers choose to take out one payday loan and pay the fee rather than overdraw a bank account several times and end up being charged a lot more.
Credit card cash advances
If your bank account is nearing empty and you need to make a purchase, putting it on a credit card can be a good alternative. However, if you need cash that is a whole different story. Especially if you actually use your credit card.
Cash advances can end up being extremely expensive. If you get a cash advance on your credit card, the company will charge you a much higher interest rate on that than it charges for your purchases. Furthermore, you cannot pay off cash advances until your other balance is paid off, so you could end up paying a high interest rate on a cash advance for a very, very long time.
Of course they’re going to be left with worse alternatives. What a lot of people really don’t get is that payday lending arose out of a legitimate demand, and so therefore a supply making itself available was a natural consequence, and the demand is obviously still there. I love how moral crusaders go after supply problems, but not demand problems. Think about this – the biggest beneficiary from payday lending being extirpated legally is going to be banks, because they’ll have total market share on short term credit, and the banks, if anyone has been watching, are incompetent – that’s why they got billions in taxpayer money. Are we sure we want to help them out any more than we already have?