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Payday Loan Lenders Feel Vindicated as result of Payday Loans study


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By: Gaurav Bhola
The common perception is that payday loans are not sound alternative financial tools. However, a recent study concludes otherwise. The study found that families without access to cash advances chose more expensive credit alternatives and faced greater financial hardships.

The November 2007 study, “Payday Holiday: How Households Fare after Payday Credit Bans,” by Donald P. Morgan, Research Officer with the Federal Reserve Bank of New York, and Cornell University graduate student Michael R. Strain, contradicts common perceptions about payday cash advance loans.

The researchers compared the households in Georgia and North Carolina, two states where payday loans were outlawed in May 2004 and December 2005, respectively with households in states with payday loans.

The preliminary conclusions point to higher credit problems for consumers where states banned cash advance payday loans. The authors discovered that in Georgia and North Carolina, the consumers have increased bounced checks, higher Chapter 7 filings, and complained more vocally about debt collectors and credit lenders.

This study contradicts the prevalent notion that payday loans are debt traps. The payday loan industry believes the study validates their notion that payday loans help consumers and are a better alternative to bounced-check ‘protection’ sold by banks, credit unions or pawnshops loans.

The payday loan is an unsecured short-term personal loan which is meant to be paid back by the borrowers’ next payday. A cash advance is a short-term solution to a short-term emergency. Borrowers solicit the payday loans to cover unexpected expenses such as, medical emergencies, pay overdue bills, pay overdraft protection fees, late bill payment penalties, or other short-term obligations.

The payday lenders feel vindicated by the study, those consumers who don’t have access to short-term personal loans are forced to turn to less attractive alternatives. The lenders have felt that their industry is unfairly targeted by consumer groups and the media, as exploiters of the low-income consumers.

However, the results of this study counter the accepted norm, the popular perceptions about the payday loans. Will this study be enough to change these perceptions? The jury is still out with a verdict.

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