Page Title: Payday Loans: Churning of Payday Loans :: Taking out multiple Payday Advances Year

Payday Loans:
Churning of Payday Loans - Taking Out Multiple Payday Advances Each Year

By Beth Nguyen

Payday Loans are indeed a subject of much passionate discussion. In this Article we examine both sides of the issue starting with an Editorial from the New York Times - Borrowers Bled Dry

Here is the highly disputed report by Center of Responsible Lending cited in the Editorial: Phantom Demand: Short-term due date generates need for repeat payday loans, accounting for 76% of total volume

The report from CRL claims that the use of "churning" or taking out a new payday loans within a 2 week period, traps borrowers in an endless cycle of debt. They estimate that 76% of payday loan volume is created by the churn of loans. The reports suggests that borrowers remain trapped in the cycle of taking out new payday loans because of the fees charged by the lenders, but we can disprove this with simple math. Even at 400% APR the monthly interest for these short term loans is 33%. So if a borrower takes out a 400.00 Loan and repays in 6 weeks - they pay around 198 in Fees. The amount due after 6 weeks is around 466.00 of which only 66 dollars are fees, based on the normal 2 week extension. Let's look at the numbers: 66 of 466 dollars are ONLY 14% of the total. It is not the 66 dollars or even the total 198 in fees that are causing the borrowers to take out another loan within 2 weeks. Churning is nothing but the effect of overextended consumers who are paying very high fees on everything, not just payday loans. The center for responsible lending makes the great mistake of only looking at one element in the financial life of payday loan borrowers. Payday loan fees alone are not the sole cause for the churn of loans: declining real wages, 50 dollar late fees for rentals, pawnshops fees, Bank NSF fees at hundreds of dollars a month, Compound Credit Card Interest, Increasing in consumer prices, and a volatile employment market all contribute to the "Payday Loan Trap."

Because of all these microeconomic effects - borrowers are not seeking a one-time demand for credit as this report suggested on page 13 of the CFRL report. Here is a quote from the report "Our analysis finds that 59 million payday loans are opened, not due to a financial emergency, but primarily because the borrower could not repay a previous payday loan and afford their regular expenses without it."

More evidence disproving the CRL Report:

In this study it is suggested that payday loan borrowing does not contribute to more bankruptcies.

Clemson University - John E. Walker Department of Economics: Restrictions on Credit: A Public Policy Analysis of Payday Lending

"Using state-level data between 1990 and 2006, we find no empirical evidence that payday lending leads to more bankruptcy filings; this finding casts doubt on the "cycle of debt" argument against payday lending."

In this study from the University of Chicago it is suggested that Payday Loans could reduce foreclosures and Crime.

University of Chicago - Adair Morse Booth School of Business:

In this Study they take a look at what happens after payday loans are restricted in two different states, the results were negative.

The Federal Reserve Bank Donald P. Morgan http://www.federalreserve.gov/

"Payday loans are widely condemned as a predatory debt trap. We test that claim by researching how households in Georgia and North Carolina have fared since those states banned payday loans in May 2004 and December 2005. Compared with households in all other states, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation-reduced payday credit supply, increased credit problems contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check 'protection' sold by credit unions and banks or loans from pawnshops."

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