That’s the thrust of this great guest piece by Center for Consumer Freedom’s Tim Miller in the Seattle Post Intelligencer:
A recently released Dartmouth College study found that after Oregon’s imposed a similar rate cap, “former payday borrowers responded by shifting into incomplete and plausibly inferior substitutes,” mostly “through checking account overdrafts of various types and/or late bills.”
It’s not a secret that financial success depends on having a full financial toolbox. And sure enough, researchers from George Mason University and Colby College have found that short-term payday loans provide options that substantially improve the chances of a borrower’s ability to financially survive.
I don’t know enough about those studies to respond to your points about them but one thing that should be taken note of, Arthur, is that the payday loan product offered in various states is, in at least many cases, a narrow exemption to the state usury law which doesn’t provide lenders with the flexibility they need to best serve their customers.
For example, customers who know in advance that they are not going to be able to pay back their loan in two weeks should be able to apply for an installment payday loan instead, whereby the loan would be paid back over a number of paydays instead of just one. This could be offered at a lower APR than a two-week payday loan rolled-over several times because the lender wouldn’t have to process each individual rollover. And where rollovers aren’t allowed it would solve the problem of customers having to borrow from one payday loan store to pay back another (with both of those options also being unnecessary additional stress for such people). Customers who had been at their job sufficiently long and/or met other requirements would qualify for the longer-term loans.
Additionally, I don’t think it’s valid to evaluate payday loans in terms of the “average” customer. For example, if for 9 out of 10 payday loan customers the availability of the loan is a temptation to overspend which somewhat worsens their financial situation (but makes them wiser) and for one out of ten it’s a godsend which saves their family from eviction, is the product doing more harm than good? I don’t think that can be decided from a statistical point of view. I think the situation is best viewed in terms of the principle that people are best off with the freedom to make their own choices and learn from their own mistakes. There should be strong disclosure laws to make sure people are not tricked into making deals that they don’t understand, but beyond that it must be their choice if we are to live in a free, and not authoritarian, society.