Thursday, November 18, 2010 2:53 PM cstanton

The Payday Lending Debate


A recent study in the Journal of Banking and Finance by Dartmouth professor Jonathan Zinman states that the ban on payday loans in Oregon ended up hurting households financially, not helping them.

"Restricting access (to cash advances) caused deterioration in the overall financial condition of Oregon households," Zinman wrote. "Overall the results are consistent with restricted access harming, not helping, consumers on average."

Most Economists agree: eliminating these short term loans drastically affects, and not in a good way, the people that utilize them. People that typically could manage to avoid late fees and defaults by using a payday loan are left out in the cold.

Comparing Oregon, who's new rate cap on payday loans has driven three fourths of lenders out of business, with Washington, which has no rate cap, Zinman made both subjective, like the way that people felt, and objective, such as employment, assessments and found that Washington fared better in both categories.

Here's an example: You're living paycheck to paycheck but you have a steady job. One morning your car breaks down. With no savings you won't be able to get the car repaired. If you don't have a credit line that will cover the cost of your repairs, you're in bad shape. Without a car, you can't get to work.

A payday loan, however, would give you access to instant cash, allowing you to repair your car and keep on getting to work. Removing that source of credit takes the last legs out of families that depend on these sorts of loans for financial emergencies. These lines of credit can make the difference that can keep someone from becoming unemployed.

That isn't the only way that the ban on this type of credit hurts consumers, though. The Gerson Lehman Group showed that households with checking accounts pay up to 13% less in overdraft, sustained overdraft, and insufficient funds fees than in states that have banned payday loans than states that allow them.

People that criticize payday loans act as if getting rid of them will stop the underlying financial trouble that Americans are facing. The fact of the matter is, this ban on payday loans won't stop the car from breaking, and remember its either the car gets repaired or you're unemployed. In these financial emergencies where payday loans AREN'T available, a consumer might resort to overdrawing their bank account, which is WAY more expensive and can lead to legal trouble. Check out this article: Payday Loans Vs. Overdraft Fees

Bottom line is competition keeps the prices low. That's simple economics. What these people that are against consumer choice don't seem to realize is that these alternative credit sources such as payday loans play an important role in providing this competition for the bigger banks. The whole reason that these places are in existence is because people are unsatisfied, or are unable to get help from, their bank's credit options. Hidden fees and hard to read legal documents have turned a lot of people off to the banks. You have to have a checking account with a bank to get a payday loan, so it is obvious which came first.

It's a widespread fact that payday loans are an expensive form of credit, and though it is noble for these community activists to try and protect people from themselves, the consequences of restricting the financial freedom of the consumers and eliminating these lines of credit will outweigh any benefits, if there are any, as Zinman's study has proved. The only people that will be affected by this ban are the most financially unstable and the most vulnerable.

What do you think?
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