Why Payday Loans Actually Help People
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UPDATED: May 6, 2013
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Payday loans are viewed by most consumer advocates as the financial equivalent of a zombie virus.
They just eat income and create a viciously repeating cycle that consumes borrowers’ money; much like zombies consume brains and human flesh while infecting other people into becoming zombies.
However, these allegations are simply untrue. While no one really tries to become a zombie in most fictional stories, when it comes to payday loans, people willingly borrow them.
Why would people borrow something that hurts them? It turns out most people aren’t hurt by payday loans because payday loans actually help people. However, misinformation has painted a very inaccurate portrayal of the payday loan industry.
Jamie Fulmer, Senior Vice President of Public Affairs at Advance America, told loans.org that misinformation frequently compares the licensed and legitimate payday loan industry with check cashers, pawn shops, and unregulated lenders.
“These misconceptions, and more insidious myths spread by opponents of our industry, have resulted in a number of short-sighted conclusions about how this service works and the role and value of short-term credit in the U.S,” said Fulmer.
Most stereotypes (generated by anti-payday loan activists) of payday loan borrowers tend to portray them as low-income and unemployed minorities who don’t have bank accounts.
This couldn’t be further from the truth.
Truth by the Numbers
According to a 2010 report by Personal Money Network on the whole payday loan industry, 96.3 percent of borrowers were employed and 99.24 percent used a checking account to secure their payday loan. Clearly, being both employed and having access to a bank means that one of the key stereotypes cast by the anti-payday loan industry is inaccurate.
Another common mistake anti-payday loan activists promote is that the industry preys upon the brave men and women of the Armed Forces. Unsurprisingly, this assertion is also wrong.
Only 0.12 percent of borrowers were active duty military members. This can largely be attributed to the Military Lending Act passed by the Bush Administration, which limited the proximity of payday loan lenders near military bases. Arguments about the financial compensation of the nation’s bravest men and women aside, it is clear that if payday loan lenders were targeting members of the military, then their targeting methods need improvement.
Low-income stereotypes always go hand-in-hand with renters. After all, homes, being the largest slice of the American Dream, are also one of the highest signs of wealth.
It turns out that nearly 75 percent of payday loan borrowers owned property; a far cry from the nation’s destitute and desperate. More to the point, this data came from 2010, the height of the housing collapse and foreclosure crisis, when fewer people owed homes at all.
Just as inaccurate as the assets of typical borrowers are the stereotypical expectations about race and ethnicity.
Far from being minorities, most payday loan borrowers are young white women according to data from the Pew Charitable Trust. For all the allegations that inner city minorities of color were preyed upon by the payday loan industry, it is clear that this is an industry that also has a white customer base — and a proportionally large one at that.
However, that is not to say that the industry itself is massive.
Only 5.5 percent of American adults used a payday loan in the past five years. Hardly an epidemic of predatory lending and certainly not as foreboding as the Student Debt Crisis.
So why all the hatred against the payday loan industry?
Blinded by Hatred
It seems clear that it is little more than a continuation and fragment of the anti-financial industry sentiment. Granted, massive “too big to fail” banks should be blamed for the role in the Great Recession, but the payday loan industry is far from acting in the role of banks.
“We have found that generally the most vocal critics of our industry are those who have never used our service,” said Fulmer. “This presents a stark contrast to our customers, who voice overwhelming appreciation. In fact, 96 percent of my company’s customers rate their experience as good or excellent in a recent customer satisfaction survey.”
“The cash advance works for them,” he noted.
Anti-payday loan sentiment is also likely generated by the bad actions of a handful of bad lenders.
As with all industries, a few bad apples can spoil the bunch. Point in case, BP, which became a household name thanks to its gross incompetence in causing the oil spill that devastated much of the gulf of Mexico and the marine dependent economies of a large number of coastal states.
Despite this occurrence, the oil industry doesn’t exactly have monthly oil disasters. More to the point, oil is still the lifeblood of industry and energy. While the world can argue for decades about whether more should be done to move away from oil dependency, the fact remains that oil is as much a part of daily life and daily used products as money and loans are.
“Any form of credit can be misused or abused, and every industry has good actors and bad actors,” said Fulmer.
Just because some payday loan lenders operate over state borders illegally or unlicensed doesn’t mean the product itself should be illegal. By that logic, the mortgage lending abuses of some mortgage lenders should mean that from now on all mortgages shall be outlawed. That’s far from logical, far from sound, and far from practical.
People will always need mortgages just as much as they will always need quick, short-term financing like payday loans.
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Payday loans are simply a way for people who would otherwise not have access to credit or loans to get financing in time for their needs. And yes, people are “in need” of short-term money for everyday expenses. The Pew Charitable Trust’s findings show that 69 percent of payday loans are used for regular expenses, rent/mortgage, and food.
Anti-payday loan sentiment won’t go away anytime soon. So long as abusive lenders still exist and so long as payday loan laws remain as chaotic as a field trip to a candy factory, there will be shifting moods towards the lending industry. Anti-payday loan activists should recognize that payday loans from licensed lenders actually help people. Perhaps once they do so, they can approach the legitimate licensed lenders to create a more comprehensive set of laws that will provide for a clear demand among the American people.