Lawrence Meyers: Payday loan ‘cycle of debt’ is a false narrative

LONDON - April 11, 2013 - PRLog -- The payday loan “cycle of debt” problem suffers from being poorly defined, and its existence is overstated. Hard data and logic dispute the claim.

Let’s define a cycle of debt. The Dallas Morning News thinks that after four refinancings, lenders should offer an installment plan, so that’s a threshold the newspaper considers abusive. The industry agrees, and its “best practices” guidelines require members to offer an installment plan after the fourth renewal.

How many loans go beyond four renewals? Data from the Office of Consumer Credit Commissioner shows it occurs only 20 percent of the time and the average number of refinancings is only 2.3. Thus, the hard data disputes the notion that this cycle of debt is widespread.

The debt cycle claim also fails the logic test. Borrowers use payday loans an average of eight times annually. Are we to believe that consumers who experience a debt cycle simply forget that experience and get payday loans multiple times a year? I think not. American consumers simply do not repeat costly financial mistakes.

Also, if the debt cycle was widespread, wouldn’t consumers complain about it? Yet the Better Business Bureau fielded only 3,300 complaints nationwide in 2012, during which time 100 million transactions took place. That’s a 0.0033 percent complaint rate. The Internet is filled with complaint websites, so one would expect millions of angry consumers sounding off, yet RipoffReport.com shows only 1,020 complaints against payday lenders — since 2004!

If this debt cycle were so widespread, wouldn’t the pool of consumers have dried up years ago? Payday loans are used by a specific demographic. As each consumer has a bad experience, he or she would stop getting those loans, and the consumer pool would shrink. Yet that pool has remained relatively constant since payday loans appeared in 1990.

Some might argue that people, despite having a debt cycle experience, just don’t have any other choices when they need money. This isn’t true, either. There are multiple options, and here is their average cost per two weeks per $100 borrowed. (Notice payday loans are neither the cheapest nor most expensive option.)

Borrowing from a friend ($0).

Credit card advance ($1).

Installment loan ($3-$8).

Pawnbroker ($5).

Auto title loan ($8-10).

Payday loan ($15-23).

Online payday loan ($25-30).

Utility Reconnect Fees ($42).

Bank overdraft fees ($60).

Loan shark (no maximum).

Thus, the debt cycle claim isn’t supported by data or logic.

Who are the people who keep returning? Is it possible that millions of borrowers use payday loans responsibly and have a good experience with them? That would explain a George Washington University survey demonstrating an 88 percent satisfaction rate with payday loans ( http://www.textloansinfo.co.uk/ ).

So where does this debt cycle narrative originate? Why do consumer advocates claim the sky is falling and the newspaper repeatedly harp on the issue?

Is it possible that consumer advocates aren’t altruistic? While editorials and columns focus on claims that lenders spend money on lobbyists out of self-interest, well-funded anti-payday loan organizations do the same thing.

Those groups could fund any number of alternative consumer loan businesses with that windfall. My firm gets calls weekly seeking funding for disruptive products that could undercut payday lenders. Instead of funding such free-market alternatives, activist organizations use the money to pay salaries and lobby against the industry. They sell what we believe is a false narrative of the debt cycle in order to reap contributions.

That’s the real story the newspaper should report on.