As states try to get rid of payday loans, other types of loans pop up in their place. Photo Credit: AR McLin/Flickr.com/CC-BY

Virginians frequenting pawn shops and title lenders more

Many states have passed laws intended to closely regulate, if not outright eliminate, payday loan lending. However, such laws don’t eliminate the need or demand for a short term credit product. The state of Virginia passed laws several years ago capping the interest rate on payday loans, which has reduced use of that particular product but not demand for financial help. Up to 10 percent of all Virginia households were estimated to have used some sort of alternative financial service, according to BusinessWeek, in a recent study done by the University of Virginia. Four percent of Virginians reported using payday loans at some point and 3 percent frequent pawn shops. Between 2004 and 2008, 70,000 Virginian households used refund anticipation loans and between 2005 and 2009, almost 150,000 Virginians used car title loans.

New class of lenders

Some of the most frequent laws passed against payday lending mandate loan repayment be done over a period of more than two weeks. The state of Colorado passed a law a year ago making the repayment period six months instead of a couple of weeks, according to the Greeley Gazette. As a result, former payday loan lenders are offering six month installment loans. When Arizona let the law allowing payday lenders to lapse in 2010, many thought that payday lending would disappear. Instead, according to the Arizona Republic, many stores simply started offering car title loans instead. In February of this year, a bill was introduced to the Arizona legislature that would authorize installment loans at higher-than-normal interest, as many consumers still need a source of short term credit. North Carolina, according to BusinessWeek, just approved a bill authorizing installment loan lenders to charge more than 36 percent interest on loans up to $1,500.

Supply and demand still rule

Though there are many products that a lot of people find less than palatable, such as payday loans, there is obviously still a demand for these products. A lot of people who don’t have access to bank credit find themselves short in between paydays or have an emergency come up that they didn’t plan for. Then they have to seek out alternative financial service providers in order to get the credit they need. Because many of these lenders don’t benefit from the kind of protections banks enjoy, they have to charge higher interest rates in order to stay open. It is undeniable that there is a demand for these types of short term credit.

Sources

BusinessWeek on VA

Greeley Gazette

Arizona Republic on payday loans leaving

Arizona Republic on new loan bill

BusinessWeek on North Carolina

Services for people without bank accounts are expanding. Photo Credit: diaper/Flickr.com/CC-BY

There is a class of people called “unbanked” who do not get a lot of media attention. The unbanked are people who have no bank account of any kind. The number of services catering to them, such as the payment management system PayNearMe, is growing.

Payment system and convenience chain form partnership

There is a new payment management system called PayNearMe that has formed a strategic partnership with 7-Eleven convenience store chain, according to BusinessWeek, that aims to serve a group of people referred to as the “unbanked” in the economic literature. The unbanked are people with no transaction account, such as a checking or savings account or debit card. PayNearMe founder Danny Shader recognized a need for these people to be able to conduct transactions, which led to him starting the company. Customers feed cash into a kiosks located in 7-Eleven locations in order to complete electronic financial transactions.

Growing number of services

PayNearMe currently can be used for such functions as shopping online or paying bills, and it costs less than getting a money order through similar services such as Western Union. The unbanked are able to secure financial services a lot easier these days, as more companies are offering products for them. Prepaid debit cards, for instance, are easily obtainable and can be used in lieu of a traditional bank account. As of January of this year, Kmart was rolling out a retail banking program at its stores, according to the Los Angeles Times, that offers services like check cashing and bill paying. Walmart already has financial service centers in 40 percent of Walmart Supercenter stores that have similar services available for unbanked and underbanked consumers. Walmart financial service centers charge far less than traditional check cashers.

A quarter of Americans do not rely totally on banks

A sizeable minority of Americans don’t rely totally on banks or credit unions to handle their financial transactions or services. The unbanked, those with no transaction accounts at all, are estimated to make up nearly 8 percent of the population, according to Forbes, about 9 million people as of 2009. A further 21 million, or about 18 percent of Americans, are defined as “underbanked,” in that they have a bank account but have to rely on alternative financial service providers, or AFSPs, to make some of their transactions for them, according to the FDIC. Nearly 47 percent of unbanked households have never had a bank account and about 41 percent said in an FDIC survey that they never intended to do so. The most common reason among the unbanked for not having a bank account was not having enough money to warrant opening a bank account.

Sources

BusinessWeek

Los Angeles Times

Forbes

Federal Deposit Insurance Corporation

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 Market, 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.

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