Unlocking credit
December 31, 2008 | industry | Comments (1)That’s the key to the future of the economy according to this story in yesterday’s New York Times:
“Credit, the disposition of one man to trust another, is singularly varying,” Walter Bagehot, the financial journalist, wrote 135 years ago.
Payday lending customers pay back 95% of their loans when due. That’s a credit system that seems to be working.
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Statement #1: More than 95% of borrowers do pay the loans back.
Statement #2: Payday lending customers pay back 95% of their loans when due.
These statements don’t say the same thing. Statement 1 is false. Statement 2 is closer to the truth, but the last two words make the sentence false.
It is true that debt written off at the typical lender amounts to 3-5% of loan volume. Hence only 1 in 20 or 1 in 30 loans are not repaid.
But it is false to say that all of the other loans are paid “when due.” In fact a very sizable fraction of customers misses their due date and incurs late or NSF fees. A 2007 Freedom of Information request in Florida revealed that 26% of payday loan debtors suffered a “return event” during the course of a year.
So if you drop the last two words Statement #2 is true. But Statement #1 is false because the average customer gets 8 loans a year. If you do the math, that means 1 customer out of 3 or 4 will have a loan go into default during the course of a year. They paid off 7 cash advances but the 8th was the straw that broke the camel’s back.
So the TILA version of Statement #1 should read like this: More than 65% of borrowers do pay all of their loans back.