Reviews | I am an economist and I support payday loans


A recent article in Bridge Magazine recounted the stories of the people who went over their heads using payday loans and needed to be rescued from the cycle of debt that followed. Stories like these prompt many to condemn the companies that sell these products – in fact, legislation has been introduced in Michigan to further restrict access to these types of loans.

The legislator should, however, proceed cautiously. Because despite these anecdotes, payday loans and other similar financial products serve a valuable purpose for many Michiganders.

Related: Payday Blues: Rural Michigan and the Quick Debt Hole

It’s easy to see why payday loans have such a bad reputation. Most people have borrowed money for a house, car, or school fees, but long-term loans offered by conventional lenders charge annual fees and relatively low interest rates.

Comparing their rates with those charged for payday loans, the latter look like a scam: the annual percentage rate for a payday loan can exceed 400%. But valuing short-term loans with the metrics used to value mortgages and auto loans is misleading and inappropriate.

Paning out payday loans for a high APR is reckless. Money is only borrowed for a short time – a few weeks, usually – so figuring out what you would hypothetically pay for a year of interest makes almost no sense. What matters most is the total amount the loan costs the consumer.

Instead of depending on an APR, short-term lenders usually charge a fixed price for borrowing a certain amount of money. We could still complain that these prices are too high. For example, it might cost $ 60 just to borrow $ 500. It seems like a bad deal that no one should take. And yet, the Center for Financial Services estimates that about 15 million Americans borrow money on similar terms.

The truth is, borrowing money this way can sometimes make financial sense. For example, what if you had to pay a $ 200 cell phone bill tomorrow and had to pay $ 75 if the payment was late? Paying $ 60 to borrow $ 500 would leave you $ 15 better off than you would have been. It’s estimated that 80% of Americans live paycheck to paycheck, so it’s not hard to imagine how millions of people could find themselves in a similar situation.

Payday loan consumers are often stuck between a rock and a hard place. It’s not like they’ve been tricked into choosing a payday loan over a relatively inexpensive long-term loan from a conventional bank. Instead, payday loan consumers are often what the Federal Deposit Insurance Corporation calls “unbanked” or “underbanked,” and they make up about a quarter of US households.

These consumers generally do not have a bank account and would not qualify for loans offered by conventional lenders. Payday loan companies are likely to be the only ones lending them money. In other words, for most clients, it’s either a payday loan or nothing.

The payday companies charge a relatively high fee for lending money to this population because they are at higher risk. Unbanked and underbanked people are much more likely to default on their loans, so lenders should charge these fees to help recover the costs they incur when lending money that is not. not reimbursed. This is the price to pay for lending to a population at risk, which conventional lenders cannot or do not want to do.

It’s always unfortunate when someone unwittingly finds themselves in financial trouble, as Bridge’s stories show. But it does not follow that severely restricting access to payday loans will solve anything. After all, the better-off also regularly gain the upper hand with conventional loans. Should we restrict access to those as well?

The reality is that payday loans serve a necessary purpose for millions of Americans. The only way to help people avoid tax difficulties is to do the hard work of educating them on how to be good financial consumers.


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