From Paige Skiba, an assistant professor of law at Vanderbilt University who does research in economics and micro-banking (quoted in The Nashville Ledger, on her opinion that payday loan shops are good for those who have an understanding of the real cost of not paying the loan back in good time.)
“I am not a person who thinks banning payday loans is a good thing,” Skiba says. “Traditionally, even though they are extremely expensive, 500 percent APR or more, payday loans can actually be a good thing for people when used the right way.
she is a woman, just fyi
I wish more people would write blogs like this that are actually helpful to read. With all the garbage floating around on the internet, it is rare to read a blog like yours instead.
Thanks anon for the tip, we will update our story.
Interesting that you of course don’t cover her research or the rest of her quotes, which indicate repeat borrowing is a huge problem and something that the industry needs to keep profits up. You are like the basketball player who doesn’t play defense, nice cherry-picking. Professor Skiba -
“but it’s true that payday lenders make their money by getting people to renew their loans a lot of times.”
“No one goes into a payday loan shop thinking that they will renew the loan five times,” she says. “They think it will really be a one-time thing. They wind up just paying the interest over and over.”
We’re not going to hide from the rest of Skiba’s comments. While you present the latter part of her quote, what about the first: “Economists think of credit as good thing. You borrow money in good times to make it through bad times…”
Not to mention the other part of the story (let’s emphasize “disagrees”):
Skiba, who has researched payday loan limits and their outcomes, disagrees with Newell that the higher amount allowed will get people into more trouble.
“I think that raising the limit actually may be a good thing for borrowers,” Skiba says. “I’ve done research on this, and it shows that, when people are allowed to borrow larger amounts, it actually helps them to repay the loan rather than renewing it a bunch of times and then eventually defaulting.”
The high interest rates, according to the industry, are necessary because of high default rates. Normal interest rates could not effectively apply as they would not cover administrative costs along with those defaults.
Continued commentary: Let’s take for example the 36 percent interest rate cap. What many overlook is that on an average $300 payday advance, lenders could only charge a fee of $4.14. Lenders could not meet their business expenses including employee payroll, health insurance, rent, and other fixed business expenses by only being allowed to charge $4.14 on a $300 loan.
In addition, when you institute restrictions on regulated short-term products, consumers will find a way to borrow the money elsewhere. Only one year after implementation of the eight-loan limit in Washington, a state representative and former supporter of the loan limit legislation, introduced a bill to repeal the law because the cap was driving people to the “illegal Internet payday lending market.”
Restrictions punish borrowers who have proven they can meet their financial obligations and discriminates against those who don’t have access to a wide range of financial options.