Payday loans have not put this woman on the street. This study indicates that there is in fact no clear correlation between using payday loans and facing financial calamity like bankruptcy. (Photo: flickr.com)

Human Ecology professors Ruth Berry and Karen Duncan of the University of Manitoba appear to have been ready to point the accusing finger at payday loans in Canada. Given supporting data, it appears they would have been happy to report that payday loans and bankruptcy were strongly connected in the Great White North. However, “The Importance of Payday Loans in Canadian Consumer Insolvency” does nothing of the sort because doing so would fly in the face of hard evidence. There is no clear correlation between bankruptcy and use of payday loans in Canada, according to the authors of this study. In fact, the overall financial well-being of payday loan customers appeared to be slightly more favorable than those surveyed who did not use payday loans.

Payday Loans in Urban Centers and Inner Cities

In much the same way that payday lending has grown across the American landscape, payday lenders have stepped in to serve people of the inner cities who have been abandoned by the traditional banking industry – all because there wasn’t enough money to be had. And yet the same banks are the ones who charge payday loan companies with exploiting the public. While it is true that interest rates (when annualized as APR) for payday loans are higher than some traditional bank loans, the ease and convenience of payday loans tends to trump the offerings of banks and credit unions who demand higher customer qualifications and force applicants through a maze of paperwork. Credit-constrained consumers who lack liquid assets continue to find payday loans infinitely useful.

Berry and Duncan Want to Find the Payday Loan-Insolvency Connection

In their quest for this grail, the authors obtain data from “the main industry players in the payday loan field in Canada,” namely National Money Mart Company, RentCash and Cash Money. They also reference the Canadian Payday Loan Association, which is the national industry association that represents at least 40 payday loan companies (including those mentioned above), and the Financial Consumer Agency of Canada through analysis of related studies.

Previous Studies Didn’t Find a Connection, Either

“Not much literature exists connecting the experience of payday loans with consumers filing for bankruptcy,” write the authors. Perhaps this is because there isn’t a real connection? One study they cite found that only one in 10 payday loan customers filed for bankruptcy following a payday loan. Other studies noted a similar percentage. Those respondents who were found to have multiple payday loans at the same time may have been more prone to bankruptcy, but this group was found to be a minority. Moderate usage – which represents the majority of payday loans – shows no clear correlation with bankruptcy filings. In fact, a study by Robert Mayer (”Payday Lending and Personal Bankruptcy,” 2004) showed that those who displayed such moderate use owed only 17 percent of net monthly income, which is hardly a bankruptcy-inducing situation.

More Findings that Break the Mold

• The authors’ data indicated that payday loan customers tended to hold less in the way of long-term loans that did those surveyed who did not use payday loans. Such loans were most often mortgage loans.
• Interestingly, those who filed for bankruptcy and had used payday loans carried “significantly less” short-term debt than those bankruptcy filers who had not filed for payday loans. Payday loan customers held a mean of $14,485 in debt for 2005 and $13,938 for 2006, while those who did not use payday loans showed a mean debt of $25,972 and $26,615 in those years.
• Insolvent consumers didn’t display any tendency toward being either male or female.
• Households surveyed who used payday loans tended to be smaller than those households who didn’t.

Data by City

Berry and Duncan analyzed data from a number of major Canadian cities. What they found tended to be consistent with what has been discussed thus far: that payday loans do not correlate directly to bankruptcy and that payday loan consumers tended to display greater financial well-being than those surveyed who had never used the short term loans. Here’s a sampling:

Vancouver: Bankruptcy households who used payday loans versus those who did not displayed a higher average income.

Calgary, Edmonton and Toronto: Payday loan users showed much less long-term debt.

Installment Loans: Yet Another Path to Avoiding Bankruptcy

Berry and Duncan freely admit that “bankrupts with payday loans are more likely to be employed and have higher incomes and lower debt-to-income ratios than other bankrupts.” This brings them to their burning question: “Do payday loans contribute to bankruptcy?” Numerous studies paint very different pictures regarding the average amount for payday loans. Since more of them point to relatively small figures, it seems unlikely that such amounts would contribute heavily to bankruptcy. And since many lenders offer installment loans as an option in the event that a consumer is unable to pay their payday loan on the maturity date, there is a built-in path leading away from default and bankruptcy.

There’s an Indictment in Here Somewhere

Despite the fact that they found that payday loan customers tended to be more financially healthy than those respondents who never used the product, Berry and Duncan continue to operate from the position that payday loans are some evil product that should be avoided at all costs. Such is not the case, truly. They fulfill a need that traditional banking has largely ignored. Oh, but if only “mainstream lenders provided more accessible services, and educational institutions and non-profit or government agencies gave more objective information about payday lenders in public service advertisements, perhaps these borrowers might attempt to access other lending options,” write the authors. They follow that statement with the false claim that payday lenders do not make their interest rates known to consumers. In America, payday loan companies are required by the Truth in Lending Act to make this information readily available to consumers.

Prescience and Payday Loan Law

If there were only a database in place that could record payday loan usage, then perhaps there would be fewer abuses. That’s what the authors suggest in their 2007 study, and it has come to pass in numerous U.S. states. “A model that might be considered for regulating the number of payday loans held by one individual is the Drug Program Information Database (DPIN) which connects Manitoba Health and all pharmacies in Manitoba to a central database,” they write in reference to a 2006 Manitoba Centre for Health Policy study. “This prevents duplication and double-doctoring by providing the dispensing pharmacy with real time information to show the patient’s drug profile and allows the pharmacist to deny filling a prescription, which is the same or similar to another recently prescribed.” This is quite similar to what we see with payday loan databases. Such inventions do tend to lean toward the nanny state frame of mind, but many lawmakers have insisted upon pushing it through.

Correlation Does Not Imply Causation

And in this case, the authors can’t even draw a correlation between payday loans and bankruptcy filings in Canada. Certainly, those who have filed for bankruptcy would be burdened by any additional debt (including payday loans), but that implies no correlation (let alone causation). “It is not possible to determine whether the loan is hastening the insolvent’s decision to file for bankruptcy,” write Berry and Duncan. I’d go further than that, based upon their findings. I’ll say what they appear unwilling to admit: that payday loans help more than they hurt when used moderately (as most are). Bankruptcy is frequently the result of a complex mixture of financial and social issues. Payday loans are no scapegoat.

Payday loans are heavily regulated in the Canadian province of Manitoba. This flies in the face of reason, as 310-LOAN's executive study indicates. (Photo: picasaweb.google.com)

Governments both large and small often take it upon themselves to decide what consumers should or shouldn’t be able to do with their own money. Call this the “nanny state” mentality if you will. Regardless, it seems that a population is somewhat less than empowered if the ability to make financial choices is taken away, replaced by rules (explicit or otherwise). Through the eyes of capitalism, if consumers are not afforded self-determination, the market flounders and the people become increasingly dependent upon their government for financial protection.

The payday loans industry has taken its lumps when it comes to regulation-happy governments. Despite well-reasoned arguments that reflect the trends, tendencies and – dare I say it – general will of the people, numerous governments have managed to push through legislation that effectively kills consumer choice and destroys the payday lending industry within the affected region. In addition to the obvious unemployment that results from such careless legislation, the consumers who demanded the payday loan product are driven to less desirable (more expensive) alternatives. There’s a reason they weren’t depending upon the traditional banking system in the first place. Just because payday lending is regulated out of states and provinces doesn’t mean all of the consumers who depending upon payday loans are acceptable risks by traditional banking industry standards.

Manitoba Allows 17 Percent APR

This rate cannot sustain a payday lending business that relies upon payday loans alone for operating profits. It’s been proven many times over. Canada’s provinces have made life difficult for businesses that offer payday loans. British Columbia has a 23 percent APR rate cap, Quebec caps rates at 35 percent and Nova Scotia allows 60 percent. Compared with Nova Scotia, it seems that Manitoba payday lending lobbyists forgot to show up for the party. I jest, of course. One 2007 study by Andrew Smyth and Nathan Slee of 310-LOAN (considered to be Canada’s largest direct payday lender) makes such a clear case that one wonders if Manitoba’s government even read it. If they had read it and still voted to go with a 17 percent APR cap, you’d wonder either what axe they have to grind or who was fronting their retreat to Aruba.

“Evidence pertaining to public hearings before the Manitoba Public Utility Board to determine maximum allowable charges and fees for payday loans“

To preface the study, the authors cite a comment by Manitoba’s Minister of Finance at the time, Greg Selinger. Selinger said that “The intention is not to drive the companies out of business, because people are showing an interest in having this service, but to make sure that when they offer the service they do it in a way that’s just and reasonable.”

What is “Just and Reasonable?”

310-LOAN, according to the authors, clearly explains their fee structure to customers before any agreements are signed. They also verify that customers are actively employed as opposed to depending upon pensions or social assistance. That is a reasonable way to treat one’s payday loan customers, it would seem. Furthermore, 310-LOAN will not accept applicants who already have more than two NSF transactions in their recent banking history or more than one outstanding payday loan with another lender. They accept applicants who can reasonably repay their payday loans. Such is a protection for both the consumer and the payday loan company. Just and reasonable care is taken that neither party is exploited.

Who Uses Payday Loans?

The study authors utilize payday loan studies from Statistics Canada (StatsCan), IpsosReid, Environics, The Public Interest Advocacy Centre (PIAC) and StratCom. When available, these findings are compared against the general Manitoban population. The data for Manitoba indicates that payday loans are used by consumers who earn a slightly below average income for the province, but these consumers are far from being the “victimized poor.”

Average Age: Neither Too Young nor Too Old

According to Environics, the average Manitoba payday loans customer is 39 years old. StatsCan puts the number at 39.5, while PIAC found the average to be 42. With these and all the following results, it should be noted (and perhaps goes without saying) that the survey audiences are not identical.

Gender Split

It’s nearly a 50/50 split according to most studies. The 2006 Census for Manitoba gave a three to four percent bump up for female payday loan customers, however.

Marital Status: Most are From Married Households

The 2006 Census found that 48 percent of payday loan customers in Manitoba were married. Environics recorded 49 percent while PIAC was significantly higher at 59 percent. For single payday loan customers, the numbers were almost identical across the board: 35 percent by the Census, 35 by Environics and 31 percent according to PIAC. Only a small sample listed themselves as separated, divorced or widowed: 17 percent in the Census, 15 percent by Environics’ count and 10 percent according to PIAC.

They Will Have Residency

Partakers of payday loans in Manitoba tend to weight more heavily toward being renters, but the RBC Home Ownership Survey used for a portion of the data indicates that a majority (61 percent) do indeed own homes. In total, renters totaled 39 (RBC), 76 (Environics) and 41 percent of the respondents. Home ownership was 61 percent according to RBC, 21 percent for Environics and 59 percent for PIAC. The variations in the Environics study are curious, but not discussed by the study authors.

Household Income: Below Average, But Not Poor

Manitoba’s payday loan portrait is decidedly middle-class according to data the study authors present. Using 2001 Census data for the province, the average income for all Manitobans was $58,360. Looking at payday loan customers, PIAC found that the average income level was $51,400 and StratCom (using stats for Toronto in the Ontario province) marked it at $53,480. Environics was considerably lower at $41,376, while StratCom (using Vancouver, British Columbia data) was $42,026.

Education Level: Educated Payday Loan Customers

Using the same sources as the previous indicator, the 2001 Census found that 23 percent of Manitobans had graduated from university, 31 percent had gone to college or vocational school and 24 percent had at least a high school diploma (leaving 23 percent under that education level). StratCom (again for Vancouver) puts those numbers at 16, 28, 44 and 12 percent, respectively. StratCom Toronto clocks in at 26, 36, 34 and a miniscule three percent (more highly educated in urban Ontario, it seems). Environics’ distribution is 21, 43, 20 and 14 percent and PIAC’s is 18, 23 52 and six percent.

Employment: Payday Loan Customers Have Steady Jobs

As stated earlier, 310-LOAN requires that their customers be gainfully employed. While this standard is not exclusive in the payday lending industry as a whole, it is a dominant requirement to which most lenders adhere. Looking first at the general population of Manitoba as surveyed by Environics, we see the following breakdown, supporting the notion that payday loans in Manitoba and beyond are taken by consumers with the ability to repay:

• Employed: 62 percent
• Unemployed: Four percent (very low by today’s standards)
• Student: Six percent
• Retired: 21 percent
• Homemaker: Four percent

The total sample of payday loan customers taken by StratCom (Vancouver and Toronto) is as follows:

• Employed: 89 percent
• Unemployed: Four percent
• Student: One percent
• Retired: Four percent
• Homemaker: One percent

For Environics in Manitoba:

• Employed: 78 percent
• Unemployed: Seven percent
• Student: Two percent
• Retired: Five percent
• Homemaker: Two percent

And finally PIAC:

• Employed: 70 percent
• Unemployed: 10 percent
• Student: Eight percent
• Retired: Seven percent
• Homemaker: Five percent

Why Does Manitoba Use Payday Loans?

Emergency cash and money to cover unexpected expenses are the main reasons given in the PIAC and Environics studies, report the 310-LOAN study authors. Environics also found that consumers use payday loans to avoid bouncing a check. For Environics:

• Necessary Emergency Cash: 36 percent
• Covering Surprise Expenses: 24 percent
• To Cover a Potential Bounced Check: 21 percent
• Short-term Income Shortage: 11 percent
• For Discretionary Purchases: Four percent
• Other: Three percent

PIAC showed similar results, but notice the differences, which are not excluded to the categories PIAC respondents didn’t even cite that did rank in the Environics study:

• Necessary Emergency Cash: 31 percent
• Covering Surprise Expenses: 34 percent
• Bounced Check: Seven percent (why it’s so much lower is unclear)
• For a Major Purchase: Five percent
• Discretionary Purchases: 16 percent (why so much higher?)

When Banks Simply Won’t Do

Speed, convenience, privacy and the ability to handle emergency financial situations were all significant indicators for payday loan customers across multiple study sources. In addition, there is some evidence that suggests some dissatisfaction with traditional banking sources. See the authors’ study for specific numbers. It should also be noted that the studies referenced lean significantly toward “very satisfied” or “somewhat satisfied” for consumer approval level with payday loans and alternative financial services.

What Does a Harsh Rate Cap Do to Payday Loans in Manitoba?

310-LOAN’s study authors attempt to illustrate this is terms of where their own business is in the product life cycle. They claim payday lending is reaching the maturity stage, where saturation in society is relatively high. “In the case of payday loans, as more lenders appear, consumers are more exposed to the product and more inclined to use it,” write the authors. The saturation tends to intensify competition, leading the market toward greater self-regulation of pricing. This competition ultimately benefits the consumer, but the competition must be allowed to reach its apex if they are to fully reap the benefits. That’s the nature of a free-market economy.

Canadian Government Thinks Competition Should Already Be Maxed

Thus, they think rates should have already reached the lowest “consumer-friendly” point. Since they consider rates to be too high (a notion that the average consumer surveyed disputes), governments impose rate caps. It kills payday lenders, but does not kill demand for payday loans.

310-LOAN finds that while payday lending has grown quickly, supply is only now starting to catch up with demand. Their support for this notion is that payday loan industry advertising spending in Manitoba has begun to exceed revenue increases only in this most recent stage in payday lending’s life cycle. Earlier findings (where the supply was lower) wouldn’t need excessive advertising in order to gain customers. Demand provided fuel for growth.

Section 347 of the Criminal Code Has Delayed Saturation

Legal woes for the payday loan industry have slowed growth. This is not to say that the product is illegal; it certainly is not. But enough roadblocks were set up by the Canadian legal system to slow payday loan industry growth. In many cases, it was even a barrier to entry for potential payday lenders. This kept many potential investors away as well.

Competition and Lower Rates: the U.S. Model

The authors cite a Federal Reserve study by Donald Morgan (”Defining and Detecting Predatory Lending“) in which the connection between more payday loan stores per capita and lower rates is made quite clear. This does not mean, as the authors comment on a 60 percent APR cap that some Manitoba lawmakers had proposed before going off the deep end at 17 percent, that such a rate would be sustainable. That’s far from the truth in their estimation. In fact, it had been widely acknowledged that 60 percent is not financially viable for payday loan companies.

“Without an agreed upon method of calculating an unconscionable rate,” write the study authors, “we suggest that the board consider the costs involved in issuing short-term, small sum loans in the market today in order to effectively set the limit on the cost of borrowing.” Using a well-known Ernst & Young study, they note the profit margins for what are considered to be Canada’s “big five” banks:

• CIBC: 23.61 percent
• BMO Bank of Montreal: 27.43 percent
• RBC Royal Bank: 23.26 percent
• Scotiabank: 32.81 percent
• TD Canada Trust: 35.51 percent
  Average: 28.52 percent

Also based upon Ernst & Young findings, the authors note that the rate for issuing a $279 payday loan is $74.08. That’s 26.55 percent for the loan issued, which compares quite favorably with the average banking profit margin above. Based upon the authors’ interpretation of data on 11 payday lenders, such a rate would allow 10 of them to “remain in the market and stimulate and immediate increase in supply and investment in the payday loan industry.”

The Risks of an Excessively Low Rate Ceiling

Allow the industry to evolve in a natural free-market setting, argue the study authors. That will enhance both product and pricing according to consumer need. Set the rates too low and lenders must slash costs wherever possible and abandon efforts to meet consumer need. For instance, allowing for installment loans has proven to be popular with consumers in many locations, but the cost associated would be impossible to swallow for lenders if rates are cut to the proverbial quick. For consumers, there is anecdotal evidence that the convenience of installment loans would outweigh having the least expensive loan possible under law.

Life Dictates Debt, Not Payday Lenders

Situations like job loss, illness and family or other personal difficulties tend to have the greatest impact upon a consumer’s ability to repay short term credit such as payday loans. Yet the Manitoba government (or any government) wants the public to believe that it is the rates of supposedly predatory lenders that cause the problem. Thus, they see rate caps as the only answer. Consumers and even economists do not tend to share such views. Interest rate caps to not solve personal and societal issues; they merely restrict the free market and tend to add trouble rather than subtract it.

Pursuit of alternative financial services like payday loans is sometimes necessary. But do the costs break the budget? (Photo: flickr.com)

There are numerous entries in the volumes of study on payday loans which suggest that low- to middle-income (LMI) families are the most frequent users of the product. Where access to credit and liquid assets are limited – particularly in areas that are not well-served by the traditional banking industry – the need for short term credit is greatest. Yet payday loan industry critics continue to produce statistics which they claim are evidence that too much of LMI families’ income is being eaten up by the allegedly excessive fees that payday lending outlets charge for their services.

Not According to this University of Michigan/Federal Reserve Study

In an August 2009 paper entitled “And Banking for All?” by Michael Barr and Benjamin Keys of the University of Michigan and Jane Dokko of the Federal Reserve Board, we see the expense for alternative financial services like payday loans expressed in very different terms for LMI families. Contrary to your average slapdash media expose, their well-researched study found (using the Detroit area as a sample) that “for the vast majority of households, annual outlays on financial services for transactional and credit products are relatively small, around one percent of annual income.” Payday loans and similar alternative financial services make up only a fraction of that, as we’ll see.

The Nature of the Study

The authors derive their data from the Detroit Area Household Financial Services (DAHFS) study. The survey takes into account which alternative and mainstream financial services LMI households tend to use. Respondent demographics, socioeconomic patterns and full access to balance sheet information helped the authors to piece together an interesting portrait of nearly 1,000 Detroit LMI households. Mainstream financial sector fees like annual bank account fees, check fees, NSF fees, bank overdraft charges and annual credit card fees are significant, while alternative financial service costs like money orders, check cashing, payday loans and others are somewhat less so.

Banked vs. Underbanked (or Unbanked)

The authors found that LMI households with access to bank accounts were more financially active and had access to more forms of credit than those households with little or no traditional banking usage. In short, the banked households tended to spend more. Underbanked LMI households displayed less willingness to access credit, but their status did not entirely preclude them from mainstream bank services. Furthermore, the state of being unbanked was shown to be a far from permanent condition. Expanding bank policies which strive to extend services to the “invisible minority,” would account for this.

Who Chooses Payday Loans?

“The alternative financial services sector plays a significant role in the provision of financial services to LMI households,” write the authors. According to Federal Reserve studies like those conducted by Brian Bucks et al in 2006, 25 percent of such households nationwide tend to be unbanked. This creates the need for such products as payday loans and check cashing services to fill the gaps that traditional forms of credit might be used.

Do Payday Loans Burden Them Unnecessarily?

That is a widely held view, but the authors’ findings suggest that convenient, easy-to-use payday loans have a negative financial impact on only “a small fraction” of LMI households. On average, LMI households (banked and unbanked) have been shown nationally to pay between $400 and $600 on payday loans yearly, which only amounts to two to three percent of annual income. For the Detroit area, the median was much lower, ranging from $41 to $98 for various credit services.

Time and distance costs for LMI households to use alternative financial services were observed to be somewhat more significant. In most cases this appeared to be the time and cost of transportation to get to brick-and-mortar payday loan and checking cashing outlets. However, I would suggest that if more consumers were aware of online payday loan services like those found at PersonalMoneyStore.com, time and transport costs would be greatly reduced or cut to nothing, so long as a home Internet connection is available.

Conservative Spending

LMI households necessarily displayed low level spending in the study. Mainstream financial service usage was low, as was alternative service usage (like payday loans). Being banked and having access to direct deposit – both of which are generally necessary in order to receive payday loans – are two areas in which LMI Detroit households surveyed were behind national averages. What this means, of course, is that widespread abuse of payday loan products would be impossible, as the possessing both of the above criteria is generally required.

Staving Off Food Shortages and Eviction

These were two categories where use of payday loans were reported among LMI households in Detroit, which would appear to indicate that such credit is relied upon in emergency situations (rather than in superfluous spending, as the media would have people believe). Access to more credit options (following a transition into the traditional financial services sector) would perhaps assist such consumers in dealing with financial issues, but the fact remains that most traditional banks simply do not have programs for which LMI households can qualify, whether it is because their credit rating is insufficient or the entry cost is too great.

Payday Loans and Fees: a Minute Percentage of Annual Income

While it is true that LMI households may curtail spending due to their relative lack of financial means, the observed debt load from payday loans and similar products didn’t prove to be excessive when they were used. Some financial institutions are rushing to catch up with payday lenders by offering similar products, but since they draw so much of their operating income from more expensive services like overdraft protection, there is little incentive to face risk and greater loss potential that goes with payday lending.

Savings is Important

The savings factor is not included in the authors’ analysis, but they do mention that consumers who face credit restrictions and income shocks that threaten to destroy their budget could certainly benefit from such education. Sadly, such things as how to budget and maintain savings for a rainy day is still something that the American public school system tends to gloss over. Basic financial literacy is something everyone should be aware of, which is why a great deal of institutional reform is needed. To their credit, many payday loan outlets and traditional banks offer information on financial education, but the ideal time to learn is during childhood.

Why So Many Unbanked?

Recall earlier that I mentioned that payday loans aren’t terribly lucrative for banks, to the point that things like overdraft protection are more interesting for them. It is true that the costs of collecting small deposits are high in relation to potential earnings. The only way to make up for that on the institutional level is to charge a higher fee. Unfortunately, such fees even apply to maintaining bank accounts, particularly for LMI customers who banks might consider to be of greater risk. The fees make having a bank account less attractive to some of the more challenged LMI households. Costs for transactions, not maintaining a minimum balance and overdrafts are often excessive. And if a household has had difficulty maintaining a bank account in the past, systems like ChexSystems let banks know. It would appear that the traditional banking system itself is designed to oppose the entry of many LMI households.

Is it Any Wonder that Payday Loans are Popular?

They are popular, indeed. And the authors’ findings regarding payday loan fees in relation to total annual income clearly indicate that they are not an excessive burden. There is a need that payday loans fill. The aftermath for most borrowers is far from catastrophic. Only the slim catastrophically impacted minority make for juicy news, I suppose.

Is this person singing the inner city blues over payday loans? Don't bet that it's that simple. (Photo: flickr.com)

Have you ever heard that statement before – that “correlation does not imply causation?” What it means is that even if one can identify a correlation (strength and direction of a relationship between two random variables), it does not automatically imply that one causes the other. Making such a connection is falling prey to a logical fallacy known in Latin as cum hoc ergo propter hoc, which translates to “with this, therefore because of this.”

People falling prey to a logical fallacy in conversation is one thing, but if a logical fallacy is central to the argument in a published academic paper that is attempting to shape public opinion and even advise lawmakers as to procedure, the work becomes irresponsible and even harmful. Such is the case with a recent intercollegiate study by Charis Kubrin and Gregory Squires of George Washington University and Steven Graves of Cal State Northridge entitled “Does Fringe Banking Exacerbate Neighborhood Crime Rates? Social Disorganization and the Ecology of Payday Lending.” Through the use of a logical fallacy, the authors attempt to link the rise of payday loan companies in middle- to low-income neighborhoods in Seattle, Washington with increased community violence. As if there could be no other contributing factors (which is something the authors even concede to more than once during their study, completely invalidating their previous hypothesis).

First, the Pro and Con Payday Loan Arguments

As we’ve heard many times before, those who are against payday loans claim that the businesses exploit the underprivileged and the uneducated. Supposedly, they cause poverty and an endless spiral of debt. On the other hand, supporters indicate that payday loans address a particular need for those who experience short term financial difficulty and are credit constrained and have little or no liquid assets to help deal with the problem. For every study that claims that payday loans cause bankruptcy, there are studies that indicate to the contrary regarding payday loans. Furthermore, numerous studies regarding the profitability of payday loans indicate that the rate charged is justified by the risk involved and that payday lending outlets do not reap excessive profits.

Causing Cities to Tear Themselves Apart?

The study authors take the angle of payday lending being an agitating agent that brings out the worst in the communities where brick-and-mortar stores are present. They see greater instances of crime in areas of Seattle where payday loan store penetration is most concentrated as a previously unstudied “price” that the communities pay for allowing the presence of payday lenders. The authors state that because payday loan stores operate with late and weekend hours – when hoodlums supposedly are out in force? –there is a greater potential for violence. Whether it is the stores themselves or their customers being subject to robbery, the authors would have us believe that providing consumers with payday loans when said consumers’ access to traditional forms of credit is restricted and short term financial need is great is somehow the fault for the violence. By that same logic, wouldn’t ATM machines, banks, liquor stores, gun stores or any other place where money is kept be a potential instigator of violence? It’s ridiculous. Capitalism should either be allowed to work as it can or American society should be dramatically restructured along the dreaded socialist lines that so many Americans claim to fear. Having payday lending outlets in your neighborhood is no more the cause than any other business where money is exchanged.

Why Seattle? Why Payday Loans?

The authors hold up Seattle as being representative of a typical large U.S. city, which sounds reasonable, but they admit that it may not create an accurate picture of the supposed payday loans/violence link for American as a whole. The Seattle communities with the greatest instances of violence in the authors’ study tended to be those where poverty was greatest. So are they saying that because payday loan outlets may be present in or near such communities that the payday loan outlets were the cause of the poverty – or the violence that stems from human frustration and need? That’s a very simplistic view that does not exist upon a well-reasoned, logical framework.

But Texas Payday Loan Customers Only Make $18K Per Year!

I’m not aware of the methodology of the Fox study that the authors cite for Texas payday loan customers, but the results seem highly unlikely (or need much greater clarification). Personal Money Store has found that the average online payday loan applicant makes $31,690 per year. For those approved for payday loans, that rises to $36,000. For those denied, it only falls to $30,672. It is indeed suspicious that there could be such a disparity between those results and those in Texas, but such questions could be indicative of the kind of care in research that the authors used in studying Seattle communities.

Repeat Customers: Beaten Down Victims?

Referring to other studies, the authors make the claim that as much as 60 percent of payday loan customers frequently and quickly borrow again. Personal Money Store customers don’t follow that model at all. Since only 4.64 percent of visitors to the site return and 7.36 percent of applicants are return visitors, it certainly doesn’t support the idea held by the authors that payday lending organizations create financial stress by hooking customers into an endless cycle of debt. It is implied that the stress such a situation could theoretically cause is in turn the flash point that spurs people in the Seattle communities to violence and violent crime. Illicit drug use and abuse, domestic violence, robbery and related crimes have what nearly any sociologist or psychologist would tell you are a complex chain of causes. The presence of payday loan stores in a community – once more – is too simplistic an answer.

Explain it Away, Social Disorganization Theory

The authors use the Social Disorganization Theory to attempt to explain their preconceived connection between the presence of payday lending and community violence. “According to the theory,” they write, “certain neighborhood characteristics can lead to social disorganization, defined as the inability of a community to realize the common values of its residents and maintain effective social controls.” Such social disorganization is the root of crime, according to the authors.

What role do payday loan stores play in the characteristics of a community? Do they structure the daily routines of residents, as the theory would require? The bulk of payday loan customer survey respondents say they use the product to help with an emergency expense, and that this hardly represents a daily occurrence. But more importantly, you cannot assume that one institution is responsible for a social problem. Bars, low-income housing and liquor stores tend to appear in distressed neighborhoods as well, but their financial import to the economic health of said communities is very real. The arguments that liquor stores and bars promote alcoholism or that gun stores promote violent crime will always be on someone’s mind, but that doesn’t make the arguments valid. The connection between payday loan stores and violence/violent crime is even more tenuous.

Build More Community Centers and Libraries

The authors (as well as many others) find that such institutions contribute positively to a community’s identity. Perhaps a lack of sufficient community resources along these lines would be a greater indicator of social disorganization? It’s no stretch to say that the community that is fragmented and the community that doesn’t spend time together would be more prone to communication breakdowns that can lead toward violent confrontation. Stifling market competition by singling out payday loan stores – not to mention robbing disadvantaged consumers of a choice that can genuinely help in the short term – is hardly a way to organize a community in a healthy manner.

While you’re at it, why not install greater security measures in areas where consumers are walking away with large sums of cash? This could be considered a failing of payday loan companies in at-risk communities. With proper security measures, perhaps robbery numbers would go down. If people know there’s a greater chance that they will be caught, they’re much less likely to commit a crime.

Payday Loans and the Drug Trade

Having cash on hand tends to be a prerequisite if an individual wishes to purchase any form of harmful street contraband. However, such behavior should never be encouraged. Payday loan stores certainly do not do so simply by nature of them providing cash to their customers. Banks do the same thing – even ones in less than reputable neighborhoods – but they are not being accused by the authors of this problematic study. Where’s the balance there?

Where the Need is Greatest

“The safest neighborhoods in Seattle have no payday lenders in them,” write the authors. There are many reasons this could be the case. Perhaps the larger, more established traditional banking industry in Seattle has effectively swayed local politicians into pushing their payday loan competition out of high-rent neighborhoods. It certainly wouldn’t be unheard of in big-city politics. What consumers in lower-income neighborhoods tend to face are situations where their restricted access to credit makes qualifying for traditional bank loans next to impossible. Hence, having payday loans they can qualify for in their own neighborhoods constitutes a great service.

Some critics would argue that big banks and credit unions are beginning to offer their own alternative to the payday loan, making those outlets obsolete. However, that’s just in theory. In execution, banks who participate in such programs admit that they do so at a loss. Their real goal – stated by none other than the FDIC – is to transition consumers into other products like overdraft protection and traditional loans. Is it any coincidence that these products can be much more expensive for consumers?

Property Values Go Down Because of Payday Loans?

Of course the authors claim that payday loans are the culprit in those at-risk communities. But remember, correlation does not imply causation. To assume that payday loans are the reason why is to be unintentionally simplistic at best, intellectually dishonest at worst. There are many factors that can contribute to a drop in property values. Many of them are beyond one’s immediate control.

The Effects of Over-Regulation

The study authors challenge lawmakers to enact policies to help control the “blight” of payday loan store presence in American communities. Capping the annual interest rate at 36 percent is one idea, which the federal government has already instituted on loans to active military. However, considering the costs of operating payday loan stores, being allowed to charge less than $2 per $100 loaned for the standard two-week payday loan duration is not enough to keep such businesses open. The result of removing the distressed consumer’s ability to choose payday loan credit is to drive them toward more expensive or even dangerous alternative. I’d like to see the authors connect those alternatives, from loan sharks to other illegal activities, to the violence they claim surrounds the payday lending industry.

Widen the Net for More Meaningful Results, Please

“An obvious extension of this research would be case studies of additional cities,” write the authors. “We suspect our findings are not unique to Seattle. But there may be variations associated with the size, demography, regional location, industrial structure, and other city characteristics that affect the linkage between payday lending and crime.” No, I’d say those factors could be some of the real causes of the violence you’re studying – rather than additional links between payday lending and crime. The authors suggest that further study in the matter is needed to fully understand the supposed connection. I’d agree that further study is needed, but that study should be based on sound reasoning and logic, rather than a logical fallacy. Politicians are easily swayed by things that resemble facts but are in reality statistical noise. On the count that their work could contribute to such institutional delinquency and laziness, Kubrin, Squires and Graves’ theory regarding payday loan stores and violence is irresponsible.

Payday Loans have the green light when it comes to going where the financial need is greatest. Access to conventional credit plays a large role. (Photo: flickr.com)

Payday loans are an inescapable landmark in America’s modern economic landscape. The popularity of the short term loan product has grown significantly since the early 1990s, and it’s no wonder. Giving consumers the ability to absorb financial shocks in the short term – enabling them to avoid hefty penalties – is useful for maintaining economic welfare. It is important for consumers to be educated as to their alternatives in a financial emergency, however. For their part, the payday lending industry (organized under such groups as the Community Financial Services Association and the Online Lenders Alliance) has helped to educate consumers as to how payday loans work and when they should or shouldn’t advisably be used. However, the responsibility rightly rests with the individual.

Unfortunately, the image still persists within the popular media that payday loans are an instrument through which unscrupulous businessmen and women exploit “at-risk” members of society. One of the primary means these critics use to attempt to prove their point is by focusing on the geographic clustering of brick-and-mortar payday loan locations (as well as pawn shops and check cashing outlets). This fails to take into account online payday loan companies and aggregators like Personal Money Store, whose average customer by income tends to fall comfortably into the middle class. However, when brick-and-mortar locations only are considered, a clear pattern of going where demand is greatest becomes apparent. A recent study by Robin Prager, the Assistant Director in the Division of Research and Statistics for the Board of Governors of the Federal Reserve System, supports the assertion that payday loan businesses tend to cluster in areas where access to credit may be restricted and liquid assets that help consumers handle financial surprises may be closer to scarce than abundant.

“Determinants of the Locations of Payday Lenders, Pawnshops and Check-Cashing Outlets“

Prager groups payday loans, pawn shops, check cashing and a number of related short term loan companies under the name “alternative financial service providers” (AFSPs). Recognizing the controversy the rapid growth of these institutions has generated, Prager analyzes the geographic placement of AFSPs. Using county-level data for the entire country, she expands upon the regional work most studies had undertaken before. Demographics, population, consumer credit profiles and the degree of strictness in state and local laws all play a role in where the largest clusters of AFSPs appear.

Rules and Regulations Facing AFSPs

Payday lending, pawn broking and check cashing aren’t overnight sensations. They date back to at least the 1930s, although payday lending may date back to Colonial America and pawn broking in its various forms is particularly ancient. As with any explosive growth industry, there has been a need for regulation. AFSPs are subject to regulations on the federal, state and local level. Such things as the Gramm-Leach-Bliley Act, the USA PATRIOT Act, and the Bank Secrecy Act all have jurisdiction. Moreover, all loan companies must follow the federal rules of the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Talent-Nelson Amendment to the 2007 Defense Authorization Bill, to name a few. On the state and local level, numerous and variable other regulations exist. It’s safe to say that a regulatory maze exists when it comes to AFSPs. While they do serve to protect consumers against potential exploitation, the question as to whether over-regulation has stifled competition with the consumer financial services industry is a more than legitimate area for study.

Urban vs. Rural Distribution

Prager found that in 2006, 98.9 percent of rural and 99.6 percent of urban counties in the U.S. featured at least one bank or thrift branch. Furthermore, two-thirds of rural and 90 percent of urban counties had at least one AFSP provider (payday lender, pawnshop, check casher, etc). Considering population by county, the average of 33,000 people were serviced by 2.5 payday loan stores, 1.2 pawn shops, 1.7 check-cashing outlets and 10.7 bank and thrift branches. On the urban side, the numbers change to 220,000 people, 16.6 payday loan stores, 7.4 pawnshops, 21.2 check cashers and 67.5 bank and thrift branches. AFSPs like payday loan companies are certainly not more prevalent than banks in Prager’s sample.

Where Do the Payday Lenders Congregate?

Prager found that the highest concentration of payday loans outlets on a per capita basis came in southern states where regulation is more forgiving: Alabama, South Carolina, Tennessee, Mississippi and Louisiana. Pawn shops concentration was also high in such areas (primarily Alabama, Mississippi and Tennessee), although check cashing ranked highest in California, Delaware, Mississippi and North Carolina.

Banks and thrifts found their highest concentration in the north central states, including Kansas, Nebraska and North Dakota. This did not tend to correlate into having a negative effect on the number of pawn shops and check cashing outlets in a county, but Prager did find a positive correlation when it came to payday loan stores.

Credit Scores Point to Subprime

Here is where we get to the heart of the matter with AFSPs like payday loan stores. They tend to appear where the need is greatest. If consumers have difficulty security mainstream credit in an emergency, then payday loans become a very attractive option. Prager introduces an equation that factors credit availability and a variety of other factors in order to express the number of AFSP outlets as a function. It is a function of the following demographic data: racial/ethnic mixture, age, consumer education, poverty standing and the county’s population density. As stated, creditworthiness and area regulations are also factors.

Here are some of Prager’s comments on results:

Looking first at the equations explaining the number of payday loan stores per million capita, we see that the results are fairly similar for urban and rural counties. In both cases the number of payday loan stores per million capita is negatively related to the share of the population that is Hispanic, positively related to the share of the population that is non-Hispanic black, and unrelated to the share that is Asian. Payday lenders are more prevalent in both urban and rural counties where a larger share of the population is below the age of 40 and less prevalent in both urban and rural counties where a larger share of the population lives below the poverty level. The number of payday loan stores per million capita is significantly related to the share of the population with a high school diploma (negative sign) and population density (positive sign) in rural, but not urban, counties.

Patterns in Payday Loan/AFSP Placement

Prager recognizes a few general patterns: 1) Payday lenders/AFSPs appear in credit challenged areas; 2) But they tend to avoid areas where the poverty level is highest; 3) AFSPs and other payday loan businesses aren’t seen to be particularly concentrated in Hispanic regions; 4) Payday lenders do tend to appear more in the African-American community; 5) population density and payday lending presence are connected in rural areas, but not as much in urban; and 6) Not surprisingly, areas with tighter regulation show a much lower instance of payday loan companies.

Payday Lenders Do Not Prey on the Poor

This is what Prager found based upon county-to-county data and it runs contrary not only to what the mainstream media would have you believe, but to the findings of a number of past studies. Credit scores remain a prime factor in distribution of AFSP. Going where the need is greatest is an idea that holds up in this instance. Mainstream credit may be less expensive on average, but if a consumer does not have the credit to access such a thing, then payday loans are the best options. As federal, state and local governments devise new ways of continuing to limit the industry, what exactly do they think credit-challenged individuals are going to do? If sinking beneath the waves of poverty so that they’re “out of sight, out of mind” is a feasible solution for elected officials, then perhaps people who can display more reason and human compassion deserve a turn.

Apply for Payday Loans here!

Think this represents the average payday loan company CEO? Think again. Profitability is hardly out of sight, even if it has allowed the industry to grow. (Photo: flickr.com)

Infinite profits earned off the backs of the infinite suffering masses. If you take your news from the multi-colored, sugar-laden toothpaste tube that is the mainstream media, then you believe that the payday loan industry is reaping massive profits while those who crawl about on their bellies are drowning in six inches of debt. It’s such an affecting image that it resides in some nether-region beyond belief. In other words, don’t buy the hype.

Payday loan companies aren’t a charitable organization, to be sure. They profit from the service they offer to consumers, but as studies like “The Profitability of Payday Loans” by Paige Skiba of Vanderbilt University Law School and Jeremy Tobacman of Oxford University indicate, the profits derived from interest are very much in line with those taken by more “traditional” lending institutions.

Short-Term Liquidity Has its Price

That’s exactly what payday loans and similar forms of short term loans provide. Their convenient immediacy (sans an extensive battery of credit and background checks) presents a certain amount of risk for lenders, so price protection is understandable. Skiba and Tobacman use financial data from the Center for Research in Security Prices (CRSP) and SEC filings, as well as loan data from several major payday loan companies.

While the most expensive payday lenders charge what amounts to over 1,000 percent APR (somewhat moot; payday lenders typically charge 12 to 20 percent for two- to four-week loans), the authors find that “lenders’ firm-level returns differ little from typical financial returns.” The implication here is that on a per-loan and per-store basis, the payday loan industry experiences high costs that bite into their “profits.”

Methodology of the Study

The authors examine the CRSP and SEC numbers for seven First we summarize publicly available, firm-level profitability data from CRSP and SEC filings. They find average returns of 10 to 25 percent each year in profit. That’s on a per-firm level.

On the individual level, it is observed that loans are generally small, yielding a meager $49 in interest on average. Yet five percent loss ratios eat up more than one quarter of that interest. Net returns (interest minus defaults) amount “in expectation over all of the marginal borrower’s loans to only about $100,” find the authors. Payday lenders, then, would appear to exist in a highly competitive environment where per-loan and per-store costs are indeed large when compared with interest earnings.

Firm-Level Profits

According to the data, payday lenders have performed well on average, earning 10.1 percent profit. Yet because returns have been volatile, the Sharpe ratio (of excess return) is close to zero. Stock data has revealed little indication of excess dividends and SEC 10-K and 10-Q show only “moderate” return on equity, find the authors. Looking at the data of the payday loan firms involved in the study and comparing their returns against those of companies in the S&P 500, the authors once again find that there is “a profile of firm-level profits that fails to approach annualized payday loan interest rates.”

It should be noted that government regulation of the payday loan industry, particularly the September 2006 Talent-Nelson Amendment cap on lending to active-duty military, have impacted firm-level large risk premiums, to the point where the FDIC even released a report (http://www.fdic.gov/regulations/safety/payday/) suggesting that the “unusual risk” accepted by payday lenders justifies the interest and suggests ways payday loan companies can effectively handle this risk.

Individual-Level Profits

How does interest as high as 7,295 percent (the highest instance in the authors’ study) per year lead to only a 10 percent equity return? The authors look at individual-level data for payday loan origination, repayment and instances of customer defaults. The authors determine a mean payday loan size of $283 and median of $269. Eighteen percent interest leads to average revenue of $49 per payday loan, but once losses are taken into account, the story changes. The authors observed that approximately nine percent of post-dated collateral checks bounce. Collections were found to be pursued internally for 60 days, during which time the lenders collected on about half.

Credit standards tell an important tale as well. The better the short term loan applicant’s credit score, the greater revenues payday lenders derive. The authors find that “the intercept of the best-fitting line at the credit score threshold is $100.49. Thus, if the industry is competitive, the total economic costs of servicing the marginal borrower equal $100.49.”

Small Money, Big Default

Returns are astronomical in theory only. Stock returns are also observed to be modest for payday lenders. Store-level costs have to play a major role in this. A 2003 study by Jerry Robinson and John Wheeler estimated 40,000 employees in the payday lending industry. Their wages totaled $1.4 billion annually. They also found that total interest revenue for payday loans totaled $4.0 to $4.3 billion in 2002, indicating that employee salaries eat up a significant portion of that (about one-third).

A 2003 study by Michael Stegman and Robert Faris found that while the 2000 per-payday loan outlet profit in North Carolina was $57,999, the capital requirements for these outlets amount to at least $35,606. This doesn’t factor in wage costs, rent, marketing or administrative expenses, but it does include bounced-check fees, screening costs and loan losses.

You begin to see how expensive it is to operate a payday loan business. Flannery and Samolyk (2005) found that store costs and their revenues are related to store age, too. Start-up costs and establishing a clientele are difficult hurdles that have led newer entrants into the payday lending market to consider the online payday loan market.

A Cash Flow Example

Skiba and Tobacman present this hypothetical. Let’s say a payday loan store has $10,000 in capital at the beginning of the year. If risk is loan default risk is eliminated from the equation and 18 percent interest is earned every two weeks, the take would be $739,500 by year’s end. If annual wages amount to $30,000 (paid out every two weeks), that bill would be a large part of the $1,800 in interest income at the beginning of the year. At that time, the store would only early six percent on its capital. The year-end result would be an annual net of 2,150 percent, which is profitable but hardly extortionary.

So Someone Thinks Payday Lenders Should Only Charge by Cost?

Critics want a flat fee for payday loans – regardless of loan size – but the truth is that so many cost variables exist such as the cost of firms to originate payday loans that per-store differences in fees charged are necessary. Considering the explosive growth within the industry (200 stores observed in 1990 according to the authors vs. 30,000 in 2004), which came in no small part due to lobbying, there is both a consumer need for the product and an environment in which they can successfully exist on the subprime market.

Pricing behavior is largely regulated by oversight organizations like the Community Financial Services Association and the Online Lenders’ Association, but businesses that exist outside these member organizations may unfortunately set rates that are far beyond what is necessary. This is where government regulation can help rein in payday loan companies with the most excessive prices (even if this group may be in the minority of the industry), but excessive regulation is not desirable. Stifling market competition and limiting consumer choice are hardly a desirable alternative.

Installment loans have been there for people from all walks of life who have been failed by the traditional credit and lending system. (Photo: flickr.com)

You’ve more than likely heard the call to arms “Stimulate the economy!” before. It takes expenditure in order to keep the wheels of commerce flowing. While the current recession has made that difficult – people are still highly unwilling to spend on non-essential purchases – the standard progression in America has been that accumulation of household debt can be just the grease needed to lubricate the economic wheels.

Of course, access to credit is a very large first step toward accumulating the managed debt and consumerist desire that creates the consistent cash infusion the American economy requires. But what happens when traditional credit is unavailable?

For large segments of the American population, being denied for traditional credit has forced them to consider other options like installment loans. The reason for these denials, according to researchers like Christian Weller of the University of Massachusetts and Center for American Progress, are multiple.

However, concepts of race and ethnicity may indeed be a determinant. In his study “Credit Access, the Costs of Credit and Credit Market Discrimination,” Weller considers household debt information in an effort to determine whether discrimination in the consumer credit market has declined, gone away or actually persisted as deregulation of credit industries has occurred. The survey referenced is the Survey of Consumer Finances (SCF), which the Federal Reserve conducts on a tri-annual basis.

Borrow to Spend, Spend to Stimulate

As families borrow, more of them can afford to undertake major purchases like homes, cars and education than otherwise. Consumer credit such as installment loans also help smooth over financial shocks that come about due to medical emergencies and other situations. If the playing field were level, it would indeed be that simple.

Yet Weller acknowledges what we all know: families don’t all have the same access to consumer credit. Demographics, minority status and income levels have contributed toward lessened chances to obtain a loan and high loan costs. Weller identifies this as “credit market discrimination.”

Restricting access to traditional loans on the basis of race, ethnicity or other personal traits yet not providing sufficient access to some form of installment loan credit when consumer need is imminent has been a failing of the traditional banking industry. As deregulation began in the late 1970s and grew to fruition in the 1990s, the message became clear: America’s economy was on track for more market competition and less discrimination.

Payday loans and installment loans filled consumer need, promoted competition (an invitation banks still haven’t taken up in earnest) and turned back some of the tide of discrimination.

Measuring the Credit Market

Weller analyzes evidence of financial constraints from the years 1989 through 2004. Looking at a sampling of borrowing families, demographic characteristics like family size, marital status, living arrangement and others are considered. Financial indicators like credit history, family income and accumulated wealth are also potential factors, although some of Weller’s findings indicate a “taste-based” form of discrimination based upon prejudicial perception may play a role. Sometimes this is even a more socio-economic form of discrimination, where those of higher income judge those with less negatively.

Consulting Professionals in Times of Financial Insecurity

When consumers face financial stress and don’t have the liquid assets on hand to absorb their financial shocks, seeking out assistance is wise. Among those surveyed by Weller, however, we see that consumers in need of aid don’t always do this. Not only that, but a disparity appears to exist along racial lines. The percentage of Caucasians who relied on financial professionals in 2004 was 45.7 percent, compared with only 27.7 percent of African–Americans and 27.2 percent of Hispanic consumers. Those families who did rely on professional assistance were found to be 17.3 percent less likely to be denied for a traditional loan.

On a related note, the rate of those who applied for traditional loans but were denied also bears a connection to race. Weller found that African–Americans were 41.7 percent more likely than Caucasians to be denied a loan. This difference became even larger when larger-scale loans like home mortgages were considered. The author cites a 1996 study by Jonathan Crook, which suggests that lower-income and older families were also more likely to experience denial on traditional loans.

Negative Expectations

Weller found that 14.9 percent of African-American families and 11.9 percent of Hispanic families claimed that that rather than experiencing a denial, they didn’t even apply for a loan because they figured they’d be turned down. Among Caucasian families, this figure was only 4.9 percent. Low versus high income levels showed a similar order. Tracking these figures from the beginning of the study period in 1989 to the end in 2004, loan denial and application discouragement increased.

For those groups who experienced the greater traditional loan denial or discouragement, Weller finds that short term consumer loans like installment loans tended to be more prevalent. In 2004, 18.2 percent of African-Americans respondents used installment loans, while 10.5 percent of Caucasians and 10.9 percent of Hispanic families. While critics of the installment loan industry would point to some of the short term consumer loan products a small number of credit unions across America offer, Weller found that only 3.6 percent of all consumer debt in the survey originated with credit unions.

An Important Distinction

Weller found that even though minority groups borrowed less from traditional lenders, which did not mean that they were significantly more likely to borrow from sources like installment loan companies or rely upon credit cards. “There is no statistically significant difference by race and ethnicity when it comes to borrowing from consumer lenders,” writes Weller. “The combination of these results with the ones on traditional banks is consistent with the earlier finding that denied and discouraged applications are larger for minorities.” The common conclusion here is that minority families in the survey had restricted access to credit when compared with Caucasian families. Low- versus high-income showed a similar breakdown.

Installment Loans are an Answer

Used responsibly, installment loans can enable any consumer to handle the financial shocks that life inevitably will throw your way. The credit restrictions that have existed in various segments of American society have necessitated the need for short term consumer credit, and products like payday loans and installment loans have filled the need. If consumers are going to partake of whatever source is available when the need is great, then the presence of a regulated industry that saves consumers from highly negative alternatives.

Thus, installment loans fill a need; they do not target groups in need. Claims of “aggressive advertising” would seem to apply more to traditional lenders, as their advertisements are much more prevalent than anything the payday loan and installment loan industry offers. I base this on my own observation, but I’m convinced it is accurate.

Weller’s suggestion that further study is needed as to why such a disconnect exists between minority and low-income groups and traditional banks is an interesting suggestion that could possibly help to close the gap and create more of the competition that fuels the American economy.

Once again, Personal Money Store proves that online payday loan customers have solid, steady incomes. Where's the exploitation? (Photo: picasaweb.google.com)

If you don’t already know that American news media is first and foremost an entertainment medium, allow me to be the one to break it to you. Sensationalism sells better than the truth. Biased story selection and reporting slant are inescapable, particularly when you consider the influence of corporate sponsorships. Since Wall Street and the American banking industry are monolithic entities, their money makes a big difference in what the public hears about the economy and the shenanigans that really led to the country’s economic collapse.

They Don’t Want You to Know that Payday Loans are Useful

So they create smear campaigns that accuse the payday lending industry of preying upon vulnerable segments of society, such as the poor and the elderly. However, many studies of the industry have proven this claim to be false. Looking at applicant demographics for Personal Money Store from June 1, 2009 to October 20, 2009, we see a different picture. Our online payday loan customers are not disadvantaged, too young or too old. They’re at a stage in life where they have financial experience and know how to spot a good deal when options are few.

The Numbers Tell the Story

Consider all customers who applied for an online payday loan on Personal Money Store (accepted or denied), here are some facts to ponder:

• Average age: 35. These are people who have some experience dealing with the financial shocks life can throw your way. As industry studies tend to show that many payday loan customers have young families, it may be safe to say that Personal Money Store’s average applicant is in a position where they need to be careful with the way they handle their finances.
• Average income: $31,690. That’s hardly poverty level, and that’s just for the individual applying. If you’re talking about 35-year-olds who are just beginning to come into their own career-wise, then you have someone who hasn’t reached their maximum earning potential yet. Perhaps their access to certain forms of credit has been limited due to a relative scarcity of liquid assets. This makes payday loans a more easily attainable option in an emergency.
• Average length of employment: 6 years. That’s an indication that the person is dependable, rather than transitory and risky. They’ve been trusted to do their job, which payday lenders definitely take into account.
• Average time at current address: 3 years. Again, this could be seen as a stability indicator. Constant relocation tends to walk hand-in-hand with fluctuating types of employment held and income levels. If a payday loan applicant is entrenched, perhaps they are less of a risk.
• Home ownership: 34 percent. While hardly a majority, this statistic is still significant. More than a third of Personal Money Store’s payday loan customers own their own home. That goes along with steady income and personal responsibility, as they have to make a monthly mortgage payment.
• Average time spent on application form: 4 minutes, 44 seconds. This tells us at least two things. First and foremost, it’s proof that it doesn’t take all that long to apply for an online payday loan. The application asks for standard information to establish a person’s employment, checking account existence, age and identity. It’s easy to complete. What this number might also tell us is that our customers aren’t rushing into the process too quickly; they’re being careful and carefully considering what the application requests.
• Percent of customers who apply for installment plans: 27.76 percent. This addresses another area where media and banking industry critics have it wrong. They claim that payday loans are a certain path toward an endless cycle of debt. Used improperly, they can cause harm. But so can Cheese Whiz. If a responsible customer (most people are responsible in this world, I find) needs to extend their repayment schedule due to unforeseen financial occurrence, installment plans are usually available.
• Percent of returning visitors out of all traffic: 4.64 percent. We hope you enjoy our site; let’s grow this number!
• Percent of applicants who are return visitors: 7.36 percent. We hope you enjoy our site; let’s grow this number! However, keep in mind that this stat also indicates that people who apply for payday loans at Personal Money Store aren’t being “roped in,” as if against their will, to that media-blustered endless cycle of debt.

The Numbers for Approved Applicants

Not everyone who applies for online payday loans at Personal Money Store receive a green light. It’s important that there are standards in place. These protect both lenders and the consumer.

• Average age: 37. Mature enough to know what financial decisions work best for them. Responsible enough to make good decisions for their families. That’s your average Personal Money Store payday loan customer in a nutshell.
• Average income: $36,000 for the applicant only. Above average in many instances, and certainly not too poor to be able to repay their payday loan debt.
• Average length of employment: 6 years. Stable.
• Average length at current address: 3 years. They’ve put down roots. Doing the right thing is important for them.
• Home ownership: 42 percent. That’s almost a 10 percent increase over the average for all applicants. It indicates responsibility and greater financial security. It goes to show that everyone can use a payday loan in a pinch.

Even Declined Applicants Show Experience, Solid Income

• Average age: 34.
• Average applicant income: $30,672.
• Average length of employment: 5 years.
• Average time at current address: 3 years.
• Home ownership: 31 percent.

Some Techie Stats For Our Online Payday Loan Applicants

You’ve heard the whole thing about the “browser wars,” right? While using Internet Explorer could be viewed as a negative in this day and age, the truth is that it has a large market share thanks to the preponderance of Windows software. Here’s a breakdown of what browsers Personal Money Store applicants use.

• Internet Explorer (all versions): 62.37 percent. It’s all about market share.
• Internet Explorer 7: 47.3 percent. Not everyone has upgraded to IE 8 yet.
• Internet Explorer 8: 32.09 percent. Here we go. But why not Firefox or Chrome?
• Internet Explorer 6: 20.57 percent. Nobody’s perfect.
• Firefox: 24.57 percent. This number seems likely to grow over time, although it may never catch IE, which has a big head start.
• Safari: 8.45 percent. Mac users take out payday loans, too.
• Chrome: 2.8 percent. This browser is relatively young, but it’s quite fast. Why not make your online payday loan application process that much faster?

Connection Speed

Personal Money Store customers have proven that they are living in the 21^st century, as at least three-quarters of applicants have access to broadband connections:

• Cable: 41.97 percent
• DSL: 23.83 percent
• T1: 9.99 percent
• Unknown: 20.82 percent. Yes, even international men and women of mystery need online payday loans.
• Dialup: 2.15 percent. I know it’s cheaper, but really? Payday loans can help with that.

So What Have We Learned Today?

Online payday loan customers at Personal Money Store do not fit the negative stereotypes the media would have you swallow hook, line and sinker. They are responsible and consider their options carefully, often because they have an entire family’s financial welfare to consider. They certainly aren’t being exploited. That’s the media’s job.

Consumerism is American. Free market capitalism and payday loans are all part of necessary competition, despite what critics would have you believe. (Photo: flickr.com)

If media and banking industry critics of payday lending are to be believed, payday loan outlets are perched in the reeds, muscles coiled in anticipation of springing upon unsuspecting consumers. “Predatory lending” is the fallback term such misinformed critics use, under the assumption that people who use payday loans are tricked or somehow lured into doing so. Yet ample evidence exists that indicates that payday loan customers are educated and take time to consider their options before choosing the short term loan product.

Understand Who Uses Payday Loans

Edward Lawrence and Gregory Elliehausen studied who uses payday loans and why in their April 2008 Contemporary Economic Policy article “A Comparative Analysis of Payday Loan Customers.” Using a national survey that takes into account numerous payday loan outlets belonging to industry trade association the Community Financial Services Association (CFSA), the authors reach beyond the veil of anecdotal evidence as they interview 427 payday loan customers from the survey. Rather than finding an uneducated, unsophisticated group that is being victimized against their will or better judgment, Lawrence and Elliehausen found that payday loan customers consider their decisions carefully and weigh the cost of payday loans against other costs both monetary and environmental.

Consumers, Consumption and Debt Burden

Consumer credit fills a definite need, particularly for segments of society without a great deal of liquid assets at their easy disposal and a significant debt burden. Building upon Juster and Shay’s 1964 study “Consumer Sensitivity to Finance Rates: An Empirical and Analytical Investigation,” where consumer credit is seen to be used on household durable goods, and multiple studies that suggest that such a method is financially feasible when the rate of return is high, Lawrence and Elliehausen point toward a model where high interest payday lending may be optimal for certain consumers. The conditions under which the authors see this would be the case are “relatively high-return investment opportunities, low current income and strong preferences for current consumption.”

Yes, We Live in a Consumer Culture

Americans see it as their right (and their curse) to “keep up with the Joneses.” When this behavior is left unchecked, personal debt can spiral out of control. Thus, when consumers look to short term loans like payday loans to handle financial shocks, they do so in large part because they do not have the liquid assets available to handle their debt obligations in lump sums. Creditors know this, so they tend to limit the amount of credit they extend so as to protect themselves from default. Unsecured personal loans are available from payday lenders to make up the difference. They are available at a cost that the authors find consumers are more willing to swallow than more expensive or socially taboo alternatives.

The Rise of Rationed Borrowers

The authors refer to the Juster and Shay study in stating that borrowers constrained by their debt loads are “rationed” borrowers. Juster and Shay theorize that rationed borrowers are “in early family life-cycle stages where rates of return on household investments would be high.” Their income would be low to moderate, which would explain the small amount of liquid assets available. Furthermore, their demand for consumer credit would be connected less to interest rates and more to the general lack of standard credit available.

That’s the way Juster and Shay saw it in 1964, 45 years ago. Things have changed a great deal since then. Creditors have a greater technical facility for assessing and pricing risk, say Lawrence and Elliehausen. The requirements for equity have lessened and the time for short term loans to reach maturity have lengthened. Unsecured credit through bank-issued credit cards has also become more readily available. There is a “subprime credit card market” for today’s rationed borrowers, but there are other alternatives that do not deal so heavily in the constant spiral of revolving debt. Payday loans have been a prime alternative for rationed borrowers.

NOT Preying Upon the Elderly

Some critics of payday loans claim the industry preys upon the elderly. However, numerous recent studies indicate that young and middle-aged consumers have contributed to an increasing demand for short term loans. Their drives are somewhat different, as Lawrence and Elliehausen’s findings show. For the young, their demand for payday loans has been predicated on how quickly they can pay off their short term loans (seven to 20 days is standard) and hence regiment their budget, whereas middle-aged  consumers’ demand is more in tune with obtaining better interest rates.

Budgetary Discipline

This sense of maintaining a budget in the face of environmental pressures resonates through various other studies. Katona’s “Psychological Economics” (1975) indicates that consumers “may be reluctant to increase credit card debt because they fear that they will not have the discipline to make payments on the additional debt.”In this case, Lawrence and Elliehausen hypothesize that consumer use of payday loans via a standard contract may be expensive in a traditional sense, but if the alternative is increased vulnerability to higher debt or even an inability to access credit, the short term loans are preferable in the long run.

Survey Says

Payday loan customers surveyed by Lawrence and Elliehausen tend to break many of the stereotypical notions spread by critics of the industry. They are not in fact poor; just over half had family incomes between $25,000 and $49,999. Considering that having an active checking account is a requirement for obtaining a payday loan, unbanked households (generally lower income) are not being exploited by such short term loans. In terms of age, two-thirds were under 45 years old, with more than one-third under 35. Only 10 percent were 55 or older, so clearly the elderly is not being targeted. Family situations indicated more than half were married or living with a partner, and 65 percent of respondents had children under 18 years of age living in the household. These are young families with debt loads who are attempting to deal with financial shocks as best they can. Now that America is in a recession, I’m sure that if Lawrence and Elliehausen conducted their survey today, the numbers would continue to support this idea.

Do They Have Other Options?

The survey indicated that a whopping 91.6 percent of payday loan customers do rely on other types of consumer credit at times. However, considering the finding that payday loan customers are less likely to use revolving credit like credit cards, one would think that they find an advantage in using the more regimented payday loan model. I would offer that it is precisely that budgetary discipline discussed earlier that makes payday loans more appealing for these rationed borrowers.

Of course, having other credit options tends to go hand-in-hand with the potential for a greater debt burden. As such, the authors’ survey found that 73 percent of payday loan customers had been turned down or limited in their ability to secure other types of loans over the past five years. Payday loans become a necessity during financial emergencies if other options are limited. In fact, two-thirds of respondents claimed they used payday loans due to unforeseen financial events.

Making Informed Decisions

Lawrence and Elliehausen found that respondents to the payday loan survey tended to follow cognitive models suggested in other consumer credit studies. Specifically, they go through a process where they recognize need, gather details, consider options, decide and then evaluate how it went in the aftermath. As the majority of consumers in the survey appeared educated (the majority were high school graduates or had college experience), it would stand to reason that payday loan customers tend to display cognitive ability and efficiency. In the case of details like APRs and finance charges, greater education tended to equate to greater awareness (where such factors were considered important in the decision-making process).

Young Families Who Consider Options Carefully

Lawrence and Elliehausen’s findings speak to the financial realities facing many American families. They’re just starting out, their wages are not yet high and they don’t have many liquid assets lying around for a rainy day. Used in a non-habitual fashion, payday loans help absorb financial shocks during times of financial difficulty. They give consumers “a little control over their financial affairs they otherwise would not have,” write the authors. Is it any wonder then that customer attitudes toward payday lending were positive in the survey? There is peace of mind in being able to handle one’s own affairs. Since the majority of those surveyed did not show signs that they were using payday loans beyond the fashion for which they were intended, why is it that the government should be so gung-ho to step in with heavy regulation and taxation? By stymieing competition in a free market economy and restricting payday loan availability, aren’t they harming both consumers in need and their own capitalist system?

What's a government small dollar loan worth? Nothing more than eagle food, apparently… (Photo: wikipedia.org)

The payday loan industry continues to fulfill the needs of consumers, particularly during the tight times of the recession. On volume, payday lenders are able to make profits that allow them to continue to operate in the majority of states. Thus, the relationship between consumers and payday loan businesses is mutually beneficial.

Now the Government in On the Deal

Did you know the FDIC recently rolled out a Small-Dollar Loan Pilot Program? They’re currently in the middle of a two-year run where they’re studying how traditional banks can offer payday loans at a profit. They’re doing this ostensibly to create an alternative to what payday loan companies offer – and as an alternative to overdraft protection, they claim – but it doesn’t appear they have a strong concept of the difference between black and red ink.

But Profitability is not the “Primary Goal”

Yes, because FDIC and associated banks are such benevolent organizations. Their hearts bleed for consumers, so much so that they use their tax dollars to loan to others without the goal of profitability! According to the Payday Loan Industry Blog, the FDIC Small-Dollar Loan Pilot Program is designed to foster long-term relationships in the communities in which its affiliate banks operate. All because they want to get good marks from those in charge of the Community Reinvestment Act. That means ACORN will be involved, folks. Do we really want to give THEM more of our tax dollars? For all the good they do, their mismanagement and ties to the subprime mortgage mess make them a questionable recipient of our money.

Banks Look Out for Their Interests

Since the bank stands to make so much more with their overdraft programs and there’s no profit to be had with the FDIC’s small loan program as it’s currently configured (more on that in a moment), how long do you think this “community outreach” effort will continue. Not long, I’d wager.

Here are the program features the FDIC has instructed banks to trumpet:

• Consumers may borrow up to $1,000
• Consumers can repay beyond one paycheck cycle
• APRs below 36 percent (we know this isn’t profitable)
• Origination fees that are low or non-existent
• Efficient underwriting
• Applications are processed quickly
• Consumer must have a savings account at that bank (A-ha! But not all participating banks required this.)
• Customers will have access to financial education (Read: Sales pitch for overdraft protection)

Banks Claim They’ll Generate Profit by Volume

Oh really? Is the FDIC going to infuse you with Monopoly money? Because if the small dollar loans operate at a loss, how does that generate profit in the long term? The Payday Loan Industry Blog nails it on the head. By “reaching out” to the community, banks will be appeasing the Center for Responsible Lending (which can easily be traced back or connected to ACORN and the Community Reinvestment Act, by the way). They’ll also have plenty of time to sell consumers over to their more lucrative products like overdraft and NSF fees. Or, if this is a war of attrition, they’ll keep taking a loss until they’ve run their competition – payday loan companies – out of business. Perfectly underhanded capitalism we have there, correct?

What about Overdraft and NSF Fees?

I’m glad you asked. According to Bankrate.com, the national average for NSF penalty fees is $24.46 at banks. A recent study by Moebs Services found that these NSF fees are responsible for 18 percent of banks’ net operating income. That number shoots up to 60 percent for credit unions in Moebs’ study. Take a look at this study by George Mason University’s Executive Director of the Statistical Assessment Service, Donald Rieck. Banks should hate the payday lending industry a great deal.

Customers Prefer the Standard Payday Loan Market

And the FDIC already knows this. Apparently Citizens’ Trust Bank attempted to run a military loans program similar to Small-Dollar Loan Pilot Program in 2008, but they had few applicants and even fewer accepted customers. Reports indicate that the originators of the program felt it was “hampered” by competition (payday loan companies). Citizens’ Trust and their “Community Relief Loan” only drew 574 applications and funded 81 loans (14 percent approval) in the first two months of the program.

Why Only 574 People?

Considering that Citizens’ Trust utilized multiple advertising avenues to promote the program, why were there so few applicants? According to the Payday Loan Industry Blog, it’s because the list of hoops customers had to jump through to actually receive money was prohibitive. From a $48 origination fee, FICO and residency duration requirements to a convoluted system of approval and a requirement (at some branches) that customers have a savings account at that bank, customers had to clear too many hurdles before they could receive funds. With payday loan companies, screening through Teletrack and similar systems is much quicker, while maintaining risk management for the lender.

Payday Lenders Don’t Need Government Subsidies

While the FDIC is convinced that funneling taxpayer dollars into banks so they can offer small-dollar loans is a good idea, it seems clear that their pricing model is completely out of left field. If banks are looking to eliminate competition via a war of attrition – if what’s best for the consumer has nothing to do with it – then taxpayers should protest what the FDIC is doing with their money.  All the FDIC would truly have to do is interview customers at participating banks to see that payday loans from outside sources are quick and convenient, which is why people come back for more. The more bureaucracy that’s added to the process, the fewer consumers will be willing to get involved. A payday loan is simple; government subsidies (with our money, mind you) and convoluted approvals processes are not.

Destroying the payday loans industry creates problems and solves nothing. Balance is needed in legislation. (Photo: wikipedia.org)

Even if you’ve never been a customer of a payday loan business, you’ve likely seen or heard about the product. You probably also know that payday loan businesses are fairly easy to find in both the brick-and-mortar world and in cyberspace. With such a proliferation, it seems obvious that there is a demand for such consumer loans. Yet for a product that millions of consumers use each year, it’s interesting that the entirely legal payday loan industry has been affixed with such a negative reputation.

Throwing Stones

The most common allegation levied against the payday lending industry is that it constitutes predatory lending, exploiting helpless consumers with high rates and other loan shark tactics. On their behalf, those who offer payday loans assert that the rates charged are appropriate to protect against risk, yet much less damaging than what consumers can encounter in fees if they don’t pay their bills or have their utilities shut off. Unfortunately, there is relatively little objective analysis that looks beyond the rhetoric of both sides of the payday lending issue. Critics adopt what they consider to be a moral high ground where they use “payday loans” and “usury” in the same sentence, while lenders defend their practice by illustrating that customers are made aware of costs before a contract is signed and by claiming that current rates are necessary in light of operating costs.

Let’s Take a Balanced Look at the Stats, Shall We?

That’s exactly what Aaron Gold does in his New York University honors thesis “Payday Lending: Grounding the Policy Debate Through Economic Analysis.” His study compares some key metrics between payday lenders (five of the largest chains, representing 25 percent of U.S. stores) and a sampling of “traditional” lenders such as banks and credit unions. In a nutshell, Gold finds that high operating expense does seem to justify the cost of payday loans. While data supports the notion that payday lenders are more profitable than traditional lenders, their profits in relation to their “break even” point aren’t as outrageous as overheated critics claim.

The Social Forces behind Payday Lending

While people from all walks of life have had the occasion to use payday loan services, averages definitely point in the direction of an upper-middle to lower class demographic. Gold cites the M.S. Barr article “Banking the Poor” in the Yale Journal on Regulation. Barr suggests that an increasing number of Americans are “under-banked” (Barr, 2004, p. 2). “Real or perceived costs and fees of maintaining traditional banking services,” suggests Barr, are simply too much of a hurdle for scores of people to clear. Considering the shenanigans of financial institutions that steered America toward the current recession, such skepticism is no surprise. Douglas McGray writes in an article entitled “Check Cashers, Redeemed” that lower income consumers and (anecdotally) some segments of immigrant communities tend to disdain the system of traditional banking and credit. Furthermore, he alludes to public relations efforts made by payday lenders in their communities (such as employing local, multi-lingual people). Thus, payday loan stores serve as comfortable, convenient one-stop shopping for those in need of quick cash during an emergency.

Payday Loans Are For Consumers with Steady Income

It is simply untrue that payday loan companies prey upon people who don’t have the money to repay. Only those with a verified steady income are eligible, a safety measure for both the consumer and the lender. An analogy Huckstep uses in his important study “Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?” is that payday loans are like a financial taxi: “Expensive for long trips, but perfectly viable for short distances” (Huckstep, 2007, p. 207). Used properly, payday loans can save consumers a great deal of money over more catastrophic alternatives. This is a fact that reputable payday lending businesses stress to consumers through their literature and service counseling.

But Are Payday Loans Too Expensive?

That’s what critics say, and the key defensive position has been that high risk justifies the price. Gold points to the 2005 FDIC study by Flannery and Samolyk “Payday Lending: Do the Costs Justify the Price?” in support of the defense, but Huckstep counters that “while loan losses may be high… that seems to be a trait of the lending industry generally, rather than a unique trait of payday lending institutions” (Huckstep, 2007, p. 230). Looking at said charge-off rates, Gold finds the ratios (dividing yearly charge-offs by the amount of originated loans during that period) between payday lenders and traditional lenders to be rather similar, and very much in keeping with overall Fed averages. In fact, the average for payday loan default is shown in Huckstep’s study to be below those of credit cards. This suggests that consumers are indeed able to handle their payday loans when compared with other kinds of consumer lending.

Do Payday Lenders Reap “Obscene” Profits?

Overall, multiple sources confirm the truth that payday lenders have enjoyed greater profits in recent years than traditional lenders based upon similar products. But Gold would have us understand that from 2006 to 2008, the profit margin above the “break even” point for the major payday loan companies decreased dramatically. There are numerous reasons for this, but Gold intimates that a lack of growth opportunities within the payday lending industry may have something to do with it. Whether this is because the industry has become overgrown and needs pruning or overzealous regulation has hamstrung businesses in too many states is debatable.

From the standpoint of the numbers, loan volume is considered to be the key to payday loan store profitability (rather than exorbitant rates). Growth and competition have a definite impact upon loan volume on a per store basis. Gold believes that consumers are attracted to payday loan locations primarily because of convenience, so expansion of store locations and operating hours are necessary to compete. However, venturing beyond a saturation point may actually decrease profits.

Good Return on Assets and Equity

Payday loan business, according to Gold’s findings, produce a greater return on assets (ROA; the ratio of operating income to average assets), which indicates that they are more efficient at what they do than banks and credit unions that offer similar products. Considering that payday loan companies tend to have a relatively small number of physical assets when compared with big traditional lenders, the payday lenders experience much less loan turnover and require much less operating capital in order to produce positive returns.

Does this mean that shareholders of payday loan companies are making a killing? Relative to traditional lenders, the equity tale of the tape says no. Gold finds that from 2004 through 2006, payday loans originators and traditional lenders were basically dead even. By 2008, however, the subprime mortgage crisis sent traditional lenders plummeting. Payday lenders readily took up the slack of consumer demand and posted a much more positive return on equity.

Scale Down, Payday Lenders?

Gold appears to lean toward the idea that if “store density is a function of price, then a reduction in density would increase loan volume and profit at remaining stores.” In such an instance, payday lenders could conceivably charge less and still collect a decent profit. A reduction in competition would then help consumers.

Payday loans could continue to satisfy consumer demand, provided the constant attack mentality of legislators (who no doubt receive sizable campaign contributions from traditional lenders). Some regulation is beneficial (since there are lenders with room in their profit margins to decrease price), but a 50 to 75 percent reduction in APR will only serve to put legal businesses down and increase unemployment. Cooler heads must prevail. As Gold puts it,

For real progress to be made toward finding an equilibrium that works for all involved in the payday debate, interested parties need to move away from inflammatory rhetoric and legislation that views the industry in binary terms. They must move toward defining acceptable interest rates and profit margins and take cautioned steps to satisfy the credit demand in an economically sustainable way.

Follow the Numbers

In America’s recessionary economy, sustainability is a highly desirable goal. Payday loans are here to stay. When will legislators admit that and work toward economic harmony?

If you could use Payday Loans, please apply here

This Federal Reserve/Vanderbilt/Penn study tries to connect payday loans to credit ruin, but what they leave out suggests a rosier alternative. (Photo: flickr.com)

Credit cards have proven to be both a useful tool in establishing a credit history and a bane to those consumers who hope to maintain a good credit history. The temptation to “swipe and go” has been actively cultivated by the American media. With the magic plastic in hand, consumption is quick and easy. Those who pay off their credit cards each month may escape the revolving interest trap, but the vast majority of credit card users must not pay their balances in full. If they did, why would credit card companies offer reward programs? If consumers weren’t tied into earning points and paying interest fees, the programs wouldn’t be profitable for the companies.

What about Payday Loans?

According to multiple sources, over 10 million U.S. households use payday loans each year. These short-term loans are paid off over a set period of time, typically two weeks’ time. They fulfill a need and are not a swipeable ticket to impulse purchases. Certainly payday loans CAN be used for impulse buys, but lenders make it clear that this is not advisable. Furthermore, the amount available is finite, typically smaller than the credit limit available on a credit card.

Yet Sources Continually Try to Connect Payday Loans to Financial Ruin

Take the January 2009 interdisciplinary study “Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?” Written by Sumit Agarwal (Federal Reserve Bank of Chicago), Paige Marta Skiba (Vanderbilt University Law School) and Jeremy Tobacman (University of Pennsylvania), this study attempts a statistical correlation between credit card default and payday loan use. In particular, the trio attempts to make the case that consumers consistently make bad decisions by choosing to take out payday loans when they have credit card liquidity.

There must be a reason that consumers make such a choice, however. Agarwal, Skiba and Tobacman do not define such reasons, so I will attempt to fill the crucial gap.

Methodology and Results

Agarwal, Skiba and Tobacman analyze a sample of 102,779 people who took out payday loans from a single lender (this is significant, as I’ll show in a moment) and 143,228 with credit card accounts in states where the same payday loan company operates. They discovered that while credit card issuers used FICO scores as the primary means of determining a consumer’s credit worthiness, the payday lender used Teletrack scores instead, which tend to track borrowing history more on the subprime scale.

According to the study authors, Teletrack scores were eight times more effective at predicting payday loan default than FICO scores. Thus, it can easily be assumed that the more effective credit evaluation device creates more successful payday loan transactions that it would defaults and additional fees. The mainstream media is too often ready to accuse the payday lending industry of wielding such fees like a fire hose on unwitting consumers, but the truth of the matter is much less dramatic.

Payday Loan Customers Have Access to Prime Credit

Even though the authors’ study indicate that on average, consumers who use payday loans have a lower average income compared with those who just use credit cards, the same study indicates that their average FICO score is still in the 620 or slightly lower range. Thus, they can still access prime credit cards.

Why is it then that, as the authors indicate,

Two-thirds of people in the matched samples have at least $1,000 of credit card liquidity on the day they take their first payday loans, much more than the typical $300 payday loan.

It’s an interesting question. A 2001 survey by Elliehausen and Lawrence regarding credit card availability and usage found that 56.5 percent of respondents who used payday loans had bank-issued credit cards with liquidity available, but 61 percent “hadn’t used them in the past year in order to avoid exceeding the cards’ credit limits.”

People Don’t Like to Admit When They Fall to Temptation

The authors show us that there is a steady decline in credit card liquidity leading up to the time when consumers take out payday loans, but the liquidity doesn’t disappear entirely. The authors comment that

This is interesting because it speaks to the question of why people borrow on payday loans. If liquidity were flat until a large drop one month before the payday loan application, we would suspect that a single large bad shock had unexpectedly arrived. Since we find average liquidity falling steadily, impatience, general financial mismanagement or persistent shocks seem more likely explanations.

Perhaps what Agarwal, Skiba and Tobacman define as “impatience” or “financial mismanagement” could include the psychological temptation having a credit card that needn’t be paid off in full each month (advisable, but generally not required). It would be worth studying that factor in greater detail, as I know from first-hand experience that having access to credit, using it and allowing it to revolve month-to-month is an easy trap. In my opinion, such situations are not out of the ordinary. Closer study is warranted.

The Author’s View of Payday Loans is Limited

Obviously, if you only survey financial results based on the clientele of a single payday lending operation, your results will be far from definitive. When the authors claim that credit card holders who take out payday loans are 92 percent more likely to experience credit card delinquency, such a dramatic number indicates to me that the statistical sample is much too small to be meaningful. If consumers evaluated by Teletrack are generally less prone to payday loan defaults, why would credit card defaults be all that different?

It is significant to note here that applying for payday loans does not generally depend upon or impact one’s FICO score. That is one of the major selling points of the product, as consumers with less than perfect credit can take out a payday loan for a set amount when necessary. There is no system of revolving credit at work with payday loans; the balance is paid in full at a set date two weeks in the future. Furthermore, since payday loans obtained after Teletrack reference are generally not recorded in a consumer’s credit history, other lenders cannot use a consumer’s payday loan history against them when they apply for large-scale loans for homes, vehicles, education, etc. If banks could use payday loan information against consumers, they most certainly would. Their track history of penalizing and confusing consumers with credit card terms prompted President Obama to step in with fair credit practice legislation, which in my mind only serves to support my argument that banks will charge whatever they can.

Why Don’t Credit Card Companies Use Teletrack?

You’d think credit card companies would find any subprime information about a consumer to be valuable in their attempts to justify higher rates and limiting practices. The study authors indicate that the reason credit card issuers don’t normally use Teletrack is that the credit bureaus charge them for each credit query. Perhaps the leverage they can glean on a consumer is not valuable enough to counteract the fees?

Temptation Yields to Payday Loans

Considering how much damage a consumer can do to their credit history by allowing revolving interest credit cards to spiral out of control, the set maturity period of payday loans could readily be considered a better option. From a psychological standpoint, not having a tempting credit card in hand when you surf E-commerce sites or drift through the local shopping mall could be advantageous to the consumer. While Agarwal, Skiba and Tobacman have the beginnings of a useful study here, a larger sample of both credit card issuers and payday loan businesses is needed to make a more meaningful assessment of the payday loan’s supposed correlation with credit destruction. Perhaps then consumers can more easily see that the practices of banks who issue credit cards may be the most harmful advice out there. See the video below if you aren’t convinced of that yet…

Related Video:

If you are looking for Payday Loans, Apply Now!

Personal Money Store is not a lender itself. However, it does provide a free service that matches borrowers with lenders. This provides a unique look into the inner workings of the sub prime lending industry. There are a few reports below which may or may not mean anything to you. We will help you draw conclusions based on the lending statistical data below the graphs.

Locations Specifically Targeted By Personal Money Store

Chicago, Fort Worth, Houston, Las Vegas, Miami, Dallas, Los Angeles, Philadelphia, Phoenix, San Diego, Tampa, United Kingdom

City Populations That Actually Apply Online with Personal Money Store

90 Day History of Personal Money Store’s Trends

City Population for 2007 Courtesy of Infoplease.com

Note: Sample data was drawn from 175,892 visitors from these 10 cities in the last ninety days. It should be noted that the majority of the visitors were to the financial news blog part of the site and not the section just for people who want a payday loan or cash advance.

Interesting Conclusions About Personal Money Store’s Trends

The people who visit Personal Money Store are not always from the locations that were specifically targeted. It just goes to show that you can’t always predict who your customers or clients will be. It is always wise to listen to statistical data to find out who really likes your business and who doesn’t and why.

New York Statistical Inferences

Almost 1% of New York City’s population has visited Personal Money Store in the last 90 days.

Of those who apply, New Yorkers are the most impatient and have a higher rate of leaving the site before completing an application. (Could just be haten on our style though! )

Compared to other cities whose visitors complete an application, New Yorkers have an average chance of getting their loan approved. This is significant because New York has very strict lending laws which many lenders shy away from.

Atlanta Loves Personal Money Store

Almost 3% of Atlanta’s population has visited in the last 90 days.

Visitors from Atlanta have the second highest percentage of getting a loan approved in the United States relative to population.

Not trivial is the fact that compared to other cities Atlanta has the second lowest application completion to application funded rate. That means there are a lot of people applying who get denied. The reason for this is Georgia has very strict lending laws that prevent approvals. (Sorry to our friends in Georgia! )

Houston Residents Love to Apply on Personal Money Store

Almost 1% of Houston’s population has visited in the last 90 days.

Texans from Houston seem more patient than New Yorkers and relative to population complete almost twice as many applications. Of the visitors who do not exit the site, people from Houston are almost 3 times more likely to apply for a payday loan or cash advance than New Yorkers. (Bigger is better and for us, the more applications the better! )

Compared to the rest of the country, people in Houston have an average chance of getting approved for a loan.

Sub Prime Lenders Love Chicago

Chicago is about average on all statistics except the most important one. Applicants from Chicago have a higher than average chance of getting approved for a loan. (These statistics seem to defy job market statistics. )

Washington DC Residents and Lenders are a Match Made in a Pot of Gold

Close to 2% of DC Residents have visited in the last 90 days.

People in DC have less than average patience with Personal Money Store and leave the site before applying. (Probably haten on our style also! )

Out of all the residents in DC .03% have actually applied for a loan on Personal Money Store.

About .0065% of people from a computer located in Washington DC have been approved for a loan through Personal Money Store. That is the highest approval rate in the nation, based on relative population statistics.

Outstandingly, Washington DC residents who apply for a payday loan or cash advance have about a 21% chance of getting approved. That is an insane number that is higher than Phoenix and Los Angeles. (People from DC, we love you! )

Statistics Can Be Fun

We have left out many conclusions that can be drawn from this data. We thought it would be fun to share this information and make a few jokes. We are not attempting to make any factual statements about the attitudes or values of any people in any city. We hope you have fun making your own judgments and conclusions. Feel free to make a statement below and join the conversation. (As long as you’re not a hater! )

Something about a reaping? (Photo: Eyehook.com)

Death by ferrets may be in your future, or cardiac arrest. Admittedly, it could be a freak game show accident. Whatever the case, you’re going to want to know what your risk of dying is, because it always pays to be prepared. That’s where Death Risk Rankings comes in. The results may be more conventional than ferrets and game show accidents; in fact, it’s mostly statistical. Know your odds, know your most likely means of death. If you like, get some fast cash and wager on those odds… just be sure not to bet against yourself. Not only would that be unintelligent, but in this case it would be unconscionable.

It needn’t be a self-fulfilling prophecy, however

FOX News reports that with Death Risk Rankings, you can get the odds on whether you’ll die next year or on any date you specify. Answer a few questions and the odds of your death will unfold before your very eyes! This is something you must know. If you need fast cash to keep your ISP from shutting you down, apply here… you must live long enough online to know how and when you’ll die!

Created by researchers at Carnegie Mellon University, Death Risk Rankings takes the answers to your questions and compares it with publicly available information from U.S. and European databases. Such things as mortality risks by gender, odds of death by age, death causes and odds of death by geographic region are all cross-analyzed against the data you provide Death Risk Rankings. Afterward, you’ll know the most probably cause of your death, as well as the probable time.

Hayley Mills and Lindsay Lohan are not in danger (immediate danger, at least)

If you’re one of the twins from “The Parent Trap” and you want to know which of you is more likely to die of breast cancer, Death Risk Rankings can help. It’s a beautiful thing. Keep in mind that the results at Death Risk Rankings are tailored to groups of society rather than individuals, so please don’t sue if unstable angina fail to strike you down at the predicted time. There are many variables in play. For instance, you could consume a bad pastry or contract a rare monkey disease. Who can say? Accidents do happen.

But don’t you just want to know?

That kind of knowledge warms the cockles like fast cash in the bank.

“It turns out that the British woman has a 33 percent higher risk of breast cancer death. But for lung/throat cancer, the results are almost reversed, and the Pennsylvania woman has a 29 percent higher risk,” explained Paul Fischbeck, Death Risk Rankings developer.

Economics professor David Gerard told FOX that “Most Americans don’t have a particularly good understanding of their own mortality risks, let alone ranking of their relevant risks.” In this way, Death Risk Rankings should prove to be a useful. Know if that Slip ‘n Slide will kill you, or whether you have a date with kidney failure. It could change the way you look at taking care of yourself.

By the numbers

According to Death Risk Rankings research, FOX reports the following benchmark data:

A 20-year-old U.S. woman has a 1 in 2,000 (or 0.05 percent) chance of dying in the next year, for example. By age 40, the risk is three times greater; by age 60, it is 16 times greater; and by age 80, it is 100 times greater (around 1 in 20 or 5 percent).

The risk becomes exponentially greater. However, Gerard takes some of the sting out of that octogenarian sentence by reminding us that “At 80, the average U.S. woman still has a 95 percent chance of making it to her 81st birthday.” You’ve come a long way, baby… what’s a little thing like Death Risk Rankings going to do to stop you now?

What about men? They die too, don’t they?

If you are indeed a zombie, you're throwing off the Death Risk Rankings curve. Stop it! (Photo: glyphjockey.com)

Yes, indeed they do, and Death Risk Rankings is there to cover the carnage. While studies by fast cash lenders show that men take advantage of fast cash more often than women, that doesn’t seem to save them from having a “much higher annual death risk” than females. The dark tale, as told by Death Risk Rankings:

For 20-year-olds, the risk is 2.5 to three times greater for men. Men are much more prone to accidents, homicides and suicides, and the risk of dying from heart disease is always higher for men than women, peaking in the 50s when men are 2.5 times at greater risk of dying.

Men have accidents. Women have cancer.

Women in their 30s and 40s show a higher instance of cancer than men, according to Death Risk Rankings. Racially, African-Americans are statistically more prone to heart disease and cancer than Caucasians. They’re also “twice as likely to die within the year as their white counterparts,” which could reflect socio-economic disparity and affiliation with negative peer groups. Yes, gang violence is what I’m talking about. It happens to all races, but Death Risk Rankings indicates a greater statistical chance that African-Americans will die in that age group. But Caucasians have a much higher (as much as three times greater) instance of suicide.

Young people tend to be more prone to death by accident. Death Risk Rankings doesn’t speculate as to why. I think it’s the psychological burden of knowing that some of them were accidents themselves. Whoops!

So large, no coffin would hold him

Obesity is a huge problem in the United States, much more so than in Europe per Death Risk Rankings. Fast cash on burgers and fries here would loosely translate to fast cash for a cup of coffee, maybe some tapas and real conversation (as opposed to texting or Facebook updates). Thanks to our horrible diets, Americans are generally more predisposed to diabetes (three times higher than Europeans, in the 60-year-old age range). If you love to supersize, Death Risk Rankings will make you a statistic.

Adding info to the health care reform debate

Yes, you knew this was coming. The statistics that indicate just how many people are failed by America’s imbalanced health care system – including those who may have taken care of themselves but still faced illness and could afford no insurance, you Social Darwinists – are right there, waiting to be exposed by Death Risk Rankings. Creator Fischbeck and Gerard see it as a useful tool in helping Congress decide.

“We believe that this tool, which allows anyone to assess their own risk of dying and to compare their risks with counterparts in the United States and Europe, could help inform the public and constructively engage them in the debate,” Fischbeck said.

Get fast cash here. Check Death Risk Rankings to see how quickly you’ll need to spend it

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If Ryan Seacrest can make $45 million, why oh why can't I?

I have been struggling a lot with money lately; it has become a constant source of stress for me. The majority of Americans out there can probably sympathize with me. Most of us were stressed out about money long before the recession started making headlines.

Still, we also read every day about people like Ryan Seacrest scoring $45 million contracts, athletes making tens of millions per season and CEOs that are worth billions. This got me thinking, with so many people getting rich out there, how can I do it?

Unpleasantly surprised

I did some research on the highest-paying jobs in the U.S. and found that singer, professional athlete, actress, filmmaker, TV show host and model are not on the list. “The list” I speak of is the highest-paying careers according to the U.S. Department of Labor. The unpleasant surprise I encountered was that even if I am able to secure a job in one of the best-paying fields in the U.S., I still won’t have money to lend.

While reading through the list, I found that while the highest-paying jobs do pay six figures, those figures are a lot closer to $100,000 than to $900,000. Of course, this is because the salaries are an average of all of the people who work in that field. That explains why actor and model didn’t make the cut. Though you can make more money than a lot of other people if you make it big in those fields, very few people actually do it, compared to the number that try.

Perception versus reality

Just to cut to the chase, according to the U.S. Department of Labor, surgeon is the highest-paid profession in the U.S., and surgeons make about $180,000 per year. CEOs make  about $140,000 on average, not the $500,000 I sort of expected. Other professions on the list include engineering manager, airline pilot, marketing manager and natural sciences manager.

If you want to see the full list, I found it on AskMen.com. But the jobs on the list aren’t what left the biggest impression on me. What shocked me most was how incredibly skewed my ideas about how much the highest-paid individuals in this country make. I thought for sure I’d find a list where everyone made millions. I realize now that because of reading about celebrities and massive financial institutions every day, I lost sight of that sometimes-too-hard-to-believe statistic that 1 percent of the nation’s population controls 40 percent of its wealth.

In good company

I am in no way encouraging anyone to give up on dreams of being rich. I am simply saying don’t get frustrated and don’t feel like you’re failing if you’re not pulling in millions. It is easy to feel like everyone who is anyone is make eight figures, but only people who have a disproportionate amount of wealth make the news because of it.

It’s true that inventors and breakout stars stumble across millions, but it doesn’t happen every day as the media might make it seem. And while a $100,000 per year salary might not sound like much compared to what Jennifer Aniston makes on one movie, it is certainly enough to live on as long as you don’t spend beyond your means.

If it needs a kick-start trade it in

If you have multiple cars on blocks outside and no immediate plans to rearrange the furniture on your front lawn, perhaps you should give your homestead look a bit of summer loving. At the very least, you should take advantage of the Cash For Clunkers 2009 program and get something that will purr when you turn the key. Their car allowance rebate system should help the environment and change your lounging area from a rust garden into a place where grass will have a fighting chance.

But the operative word is should. Apparently, the Web site it up but the rules aren’t completely in place. Until then, use cash advances as the fast loans that help you make that down payment on a newer vehicle.

“Tell your dealers so we don’t have to!”

Justin Hyde of the Detroit Free Press reports that while Congress has passed Cash For Clunkers 2009 and the Web site www.cars.gov is in place, rules to govern the program could take up to a month to hammer out. That’s government efficiency for you.

Cars.gov so far is a source that offers information on how the exchange process (clunker for fuel-efficient roadster) will go down. It also urges consumers to contact their local dealers in order to talk them into registering for the program. To me, it seems that that should be the job of the government. I elected you for what reason, again? I pay taxes for… what was that again? Representation? What a concept!

Will Cash For Clunkers 2009 be enough incentive?

Congress has sent their approved version of the $1 billion bill to President Obama for his signature. As it stands, it is designed to give about 250,000 consumers $3,500 to $4,500 in money off the sticker price of a newer, more fuel-efficient vehicle. The original target was $4 billion and one million cars, but the real question is whether people who have held on to their rust buckets will even be able to afford the reduced-price cars once the deal is made. $3,500 to $4,500 isn’t that much if you’re talking a sticker price of $25,000 or more. It helps, but higher-priced vehicles will still be out of reach of many.

What about this delay? CNW Marketing/Research claims that the delay in getting the sign off by Congress is the culprit. Not only did they lessen the scope of the program – which means it will help only a quarter of those originally intended – but now car shoppers won’t be able to take advantage of the program through July. And guess what? There’s a November 1 cutoff, too! Perhaps it will read “between 11:57 p.m. and 12:01 a.m. on the third Tuesday of September by the time Obama’s done with it.

Even with the financial assistance, CNW predicts that buyers will be going primarily for Asian makes. Make it better and make it cheaper, America. Too many big, expensive hulks is what got the industry into this mess in the first place. Better, more fuel-efficient cars are better for the environment, too, although CNW believes that when it comes to Cash For Clunkers 2009, “the environmental impact will be minuscule considering the number of vehicles actually being replaced.”

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This concludes this article. CLICK HERE if you missed part five.

***

Go where there is greatest need

Meyers takes exception to the authors’ claim that “75 percent of America considers itself Christian. It therefore stands to reason that three out of four of any type of retail store will exist in an area where Christians live and control others.” He takes this position primarily because the authors’ present no evidence that proves this theory. And as far as 75 percent of Americans claiming to be Christian, there are polls to support this, but there is also ample evidence that many people in America change religions or support atheism, so take the numbers with a grain of salt. It all depends upon who you ask, their methodology and which way the wind is blowing.

Meyers states that payday loan stores appear where there is need. Otherwise, they would be much less likely to remain in business. This is no different than with any other storefront business that aims to stay in business. It would be illogical to expect to find a BMW dealership in the inner city, generally. This has nothing to do with race, ethnicity, or religion. It’s economics. The only way to truly understand the variables at play in payday loan store location is to conduct grassroots, person-to-person surveys at storefronts. The authors did not do this, and hence their viewpoints on clientele cannot be accurate.

Here’s the punch line

“Our findings should serve as conclusive proof that conservative Christian Americans are a prime target of PDLs,” write Graves and Peterson.

Wham! Bam! It’s that simple. Yet their findings offered no conclusive proof and their research methods were completely ineffective, says Meyers. They began their study with a pronounced bias against payday loans, and their methods did nothing but solidify that bias in readers’ minds. As Meyers begins his concluding statement:

They select data from biased sources in financial competition with payday lenders, cherry-pick quotes from studies that reach divergent conclusions, selectively interpret Scriptural passages to support a flawed definition of usury, base their entire methodology on inaccurate data and sampling bias, and present data subject to omitted variable bias.

Was this trip really necessary?

Graves and Peterson’s work proves no correlation between the location of payday loan stores and societal exploitation. There is no proof of causation. They even take it upon themselves to attack Christian legislators who vote in favor of payday loans on the free market. Meyers wraps it up by stating what we already know:

With the hypothesis itself of no value, and the methodology and conclusions also demonstrated to be false, the entire paper is rendered meaningless. It renders unfair judgment on payday lenders and Christian politicians. Worst of all, it implies favoritism towards paternalistic government policy.

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This is the conclusion of my look at Lawrence Meyers’ critique of Graves and Peterson’s biased academic screed “Usury Law and the Christian Right: Faith Based Political Power and the Geography of the American Payday Loan Regulation.” CLICK HERE if you missed the last segment of this article. Before I move on to Meyers’ wrap-up of the authors’ final odds and ends, I want to hit the reset button on a pertinent topic when it comes to payday loans and “usurious” interest: British philosopher Jeremy Bentham and his utilitarian views of freedom.

Defending usury

Customer satisfaction with and the proliferation of payday loans in society are strong indicators that the product should be here to stay. English philosopher and financial reformer Jeremy Bentham would no doubt agree. In fact, he argues on behalf of usury as an essential element of free trade and financial freedom. The market dictates price, and competition forces a fair price when collusion is guarded against.

Bentham’s ideas about usury have been debated ever since his work “Defence of Usury” first appeared in 1787. Policymakers and the lay public are more conscious of undue regulation of interest on products like payday loans in large part thanks to reformist thinking like Bentham’s. I advise you to check his work out if you are at all interested in liberty and utilitarianism.

Meyers sweeps the floor

Here’s more, straight from the authors’ mouths. Meyers has the broom out, ready for the sweep.

PDLs have exploded into an industry with more than McDonald’s, BK, Sears, JCPenny, and Target combined. For those concerned about the social moral and spiritual well-being of the lower and moderate income Americans, this is a profound, unprecedented and troubling change.

Obesity and heart disease are REAL social issues. The authors have failed to make their case that we should be worried about payday loans. Fast food presents a real and present health risk if consumed too often (as Americans like myself are wont to do). If you want to talk about cost, Meyers argues, how about “rising health care costs, burden on the health care delivery system, as well as to the individual health of those that use those products irresponsibly?” This is far more serious than any minority of customers who default upon their payday loan repayment. As far as the retail outlets the authors mention, I could assay a guess that they contribute to rampant consumerism, and frayed credit ratings, stress and financially challenged families are the result. I’ve been there, too.

Mapping malady

The connections the authors attempt to convey via their mapping of payday loan store locations and their “assault” on the poor and minorities falls utterly flat. Meyers says in no uncertain terms that their strategy “fails to fully develop a broad economic theory of the many possible determinants of payday loan storefront locations.” It goes beyond mere census demographics for areas considered. Meyers suggests there are likely numerous omitted variables here, variables which the authors completely ignored.

According to Indiana Wesleyan Economics Professor Thomas Lehman’s critique of the 2005 D. Saltes study “Race Matters: The Concentration of Payday Lenders in African-American Neighborhoods in North Carolina,” the professor states that “finding an apparent relationship in a regression that actually doesn’t exist can be a consequence of omitted variable bias.”

CLICK HERE for the conclusion of this article…

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How the authors' Christian Power Rankings should have been determined...

Welcome back. Last time, I looked at how Lawrence Meyers critiques Graves and Peterson’s thoroughly biased, pointlessly religious anti-payday loan paper. Let’s continue with the analysis of Meyers’ views on “Usury Law and the Christian Right: Faith Based Political Power and the Geography of the American Payday Loan Regulation.” Apparently, the authors were pious enough to devise a stat called “Christian Power Rankings.”

CPI: Kokomo

Could be a new CSI, but it’s much less dramatic and the acting falls well below the Caruso threshold. Graves and Peterson have created “Christian Power Rankings” (CPI) that take three factors into account. As Meyers sees it, two of these are taken from “incomplete data and sampling bias.” The authors have this to say about criteria number one (per capita density):

The per capita density of Evangelical Christians and Mormons involved trying to rank states based on the simple percentage of people whom we believe are prone to use their Christian Faith to guide them as they vote for public officials.

And Meyers calls the authors’ sampling bias bluff. How can statements like “whom we believe” head in any other direction? This is a thoroughly biased editorial Graves and Peterson have written, not an objective academic paper on the religious ills of payday loans. How can religion and objectivity co-exist, anyway? If you hold to the tenets of your religion, you are supposed to see things in no other way, which eliminates the possibility of objectivity. Either you buy the story or you don’t; fundamentalists don’t like buffet customers.

“How can scientific conclusions be obtained when the experimenters randomly and subjectively apply their opinion to something,” Meyers asks. The authors admit that “obtaining good data based on religious affiliation is not easy.” Valueless information makes the CPI score a valueless statistic.

Getting a representative sample

Criteria number two for the CPI is “the opinions of conservative Christian Groups actively engaged in the political process.” Voting scorecards were used by the authors. They intended for the voters to score members of each state legislature, and individual state governments are largely responsible for drafting payday loan and installment loan legislation. However, the voters limited their scoring to Washington D.C. legislators, which is far from a representative sample of the entire nation. Yet the authors simply throw up their hands and pretend it is a representative sample. Here is Meyers’ response:

One cannot assign a proxy, such as this, when it dismisses the differences that exist between state and federal party affiliation. Also, legislative decisions made at the state level are subject to infinite political variables that differ from those at the federal level. As it is, with current attempts at federal legislation, the April 2nd hearing of the House Finance Subcommittee, showed broad differences between federal legislators opinions on payday loans and those at the state level.

No scientific accuracy equals another worthless measurement. Graves and Peterson have only one more left to save the CPI from Sheol…

Congressional voting records on… other issues?

The third leg of the CPI tripod is the authors’ attempt to take “an average statewide Congressional delegation voting record on social/cultural issues as published online by Poole and Rosenthal.” The authors used data from the 108th Congress, which was the last session they could obtain data from before publication. Since a wide range of other issues are covered by Congress, it is faulty reasoning to believe that all of these can in some way be applied to payday loan issues. Meyers doesn’t spend much time with this third point, perhaps in that in falls under the banner of being non-representative (just like the last point).

I can almost imagine the authors with a “good/bad” list in front of them as they’re pre-planning their payday loan study. “Vandalism is bad, the war on drugs is bad, and the Bible tells us (or someone read it and sold us a bill of goods) that payday loans are bad, so they all fall into the same category of analysis! Eureka!”

CLICK HERE and see how Meyers wraps up his critique of the dubious Misters Graves and Peterson…

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Last time, we talked about how Graves and Peterson’s study on payday loans and the Christian right made false claims regarding whether the short term loan product targets the poor or minority groups. Now, let’s continue our look at Lawrence Meyers‘ critique of a very flawed treatise against payday loans with his exploration of how the authors misstep in their views regarding whether it is usury that should be condemned by the Christian right.

Usury and Christianity

As a refresher, here are a few key Bible scriptures through which the Christian right claims that usury is condemned:

Exodus 22:25 - “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shall thou lay upon him usury.”

Ezekiel 22:16-16 – “In thee have they taken gifts to shed blood; thou hast taken usury and increase, and thou has greedily gained of they neighbors by extortion, and hast forgotten me, saith the lord GOD. Behold therefore I have smitten mine hand at thy dishonest gain which thou hast made, and at they blood which hath been in the midst of thee. Can thine heart endure, or can thine hands be strong in the days that I shall deal with thee? I the LORD have spoken it, and will do it. And I will scatter thee among the heathen, and disperse thee in the countries, and will consume thy filthiness out of thee. And thou shalt take thin inheritance in thyself in the sight of the heathen, and thou shalt know that I am the LORD.”

Ezekiel 18:8-17 – “He that hath not given forth on usury, neither hath taken increase, that hath withdrawn his hand from  iniquity, hath executed true judgment between man and man, hath walked in my statutes, and hath kept my judgments, to  heal truly; he is just, he shall surely live, saith the Lord GOD.”

However, there are Old Testament passages that appear to permit Hebrews to make interest-bearing payday loans to non-Jews, but not to fellow Jews. Jesus Christ’s ministry later led Christians to believe that loans with interest were verboten. However, the Renaissance and Protestant Reformation cured this malady. This is apparently when Christians discovered how to run a business that was both honest and profitable (not just the former). Religious leaders began to question whether interest was indeed valuable. John Calvin, Martin Luther and others said that only out-of-control interest was wrong. Pope Paul II even went on to approved pawnshops in 1461, so there has historically been a place for money lending in Christianity.

So what’s Graves and Peterson’s main problem?

Meyers concedes that taking advantage of the poor has never been good for PR or business. Thus, it wasn’t good in the church’s eyes. But the inherent flaw in the authors’ argument is that payday loans harm the consumer, without presenting sufficient evidence to back up their claim. There have been numerous unbiased academic studies that suggest that payday loans actually help consumers, so the author’s need to do better than opinion to make a counterclaim. They need evidence. However, I can sympathize with their dilemma a bit here, as conclusive studies that show payday loans as a weapon against society do not exist.

Meyers points out that “consumer behavior and true rates of on-time repayment demonstrates the product’s value.” There are no comprehensive studies of payday loan borrowers, but perhaps it is telling that 154 million such transactions occurred in 2008 (according to Meyers). This could indicative that consumers prefer this choice over other options.

Religious leaders know good business when they see it

The Bible is a fan of commerce. It is neither holy, Godly, nor intelligent to shut businesses down because of a voice in one’s head. Only when there is overwhelming demonstrable harm can a reasonable stance be taken against payday loans in this way. Since many consumers support the product, shutting the industry down would send who need borrow money but are perhaps struggling with their credit to less desirable alternatives.

Meyers is also flabbergasted by the authors’ failure to pin down how payday loans are usury in the modern sense. He points to this article, which clearly illustrates that payday loans do not fit the definition. So, as the authors pose, “If the Bible so clearly and forcefully condemns usury, one would hypothesize that political jurisdictions with a traditional, conservative Christian perspective would adopt law reflecting this Biblical value.” Well, wouldn’t one?

Yes, but it just doesn’t happen. Meyers attacks this position. “The hypothesis that Christian political jurisdictions would adopt laws reflecting Biblical value is false if lawmakers do not consider payday lending to be usury,” he says.

CLICK HERE to continue reading…

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