July 27, 2012
The television show “MythBusters” is a television show where two stunt and special effects experts (note to kids: science is awesome) determine if long-standing claims are fact or indeed a “myth.” Last week the Pew Charitable Trusts did their own mythbusting! They released a well-designed study that surveyed thousands of payday loan borrowers. The data is rich and the point is clear; borrowers pay a lot in fees and borrow for a long period of time. Below is a bit more breakdown:
Myth 1: Payday loan borrowers use the money for unexpected expenses and emergencies. According to the borrowers, not so much. Just under 70 percent reported using the loans for reoccurring expenses when they took out their first loan. The study did not ask, however, how many people used their loan to pay off an existing payday loan.
Myth 2: In states where payday lenders don’t operate storefronts, people flock to Internet lending. In states that restrict payday lending, 95 of 100 potential borrowers chose not to purchase payday loans at all. Just five borrow online or elsewhere. This myth popped up again in Pennsylvania as storefront lenders lobbied policymakers to legalize payday lending because Pennsylvania’s were flocking to Internet lending.
Myth 3: Borrowers are in and out of the payday loan in two weeks. The average borrower is indebted for 5 months out of the year. In fact, the average borrower takes out 8 loans of $375 per year, paying $520 in fees. As we researchers continue to point out, the structure of the loan makes it unlikely that a borrower can pay off the original loan with fees and not need additional income for other expenses.
Myth 4: Without payday loans, people will have no alternatives. If payday loans were unavailable, some 81 percent of respondents said they would cut back on expenses first. The results indicate most borrowers would choose options that do not link them to a financial institution for borrowing. A few years back, the Center for Responsible Lending (CRL) released a report that detailed how three-quarters of borrowers need to borrow after paying their first loan but before their next pay period.
Pew will be releasing additional data on small dollar lending and we will continue to monitor how payday lending impacts working families. Coincidentally, Senator Durbin (D-IL) introduced a federal usury cap bill (S. 3452) that would limit lending to 36% nationally, including payday loans. The Urban Institute found that “restricting supply without introducing alternative products can reduce consumer well-being, as consumers turn to inferior products or options to deal with credit needs.” But those products must have lower fees and a longer term for repayment to help working families. So the cap approach can be productive if we’re able to encourage alternative products. That should include a mix of better saving and credit products, but regardless of what path forward we choose, we should let the facts guide our decision making, not a bunch of costly myths.