Steven V. Martino’s letter of 1/29 is typical of payday lending opponents. It is long on accusations and short on facts. When presented with reasoned analysis in the comments section, Martino refuses to address the arguments, instead using the ad hominem fallacy by declaring anyone who disagrees with him to be “clueless” and asking, “how much is the industry paying you to say these things?”
I’ve seen this style of “argumentation” for eight years, ever since I began writing about the industry in the financial press. Opponents see a high APR, conclude the loan is predatory, and stop there. They never dig any deeper, and when presented with logical and factual arguments, they respond with the ad hom argument because the facts are not on their side.
So let’s get down to business and examine this issue in detail.
There is a need for short-term credit. At one time, people obtained personal lines of credit from finance companies, later purchased by the banks, which didn’t find them profitable enough, so they shut them down. People were left with few options, so they usually would bounce a check at a cost of $50-$60 per check, which would often trigger multiple checks bouncing.
Short Term Credit Choices
There are now many options for short-term credit, of which PDLs are neither the most nor least expensive. Here is a list, with national average cost per hundred dollars borrowed.
Borrow from a friend/employer
Cost per 2 weeks: $0; 0% APR
Credit Card Advance
Cost per 2 weeks: $1; 26% APR
Cost per 2 weeks: $3 - $8; 78% - 208% APR; longer term & larger loans = higher cost
Cost per 2 weeks: $9; 234% APR
Bank Payday Loan (Wells Fargo; Fifth Third, et al)
Cost per 2 weeks: $10; 260% APR
Auto Title Loan
Cost per 2 weeks: $10 - $12; 260% - 312% APR
Cost per 2 weeks: $15; 390% APR
Cost per 2 weeks: $25 - $30; 650% - 780% APR
Utility Late Fee
Cost per 2 weeks: $46; 1,196% APR
Bank overdraft fees
Cost per 2 weeks: $60; 1,560% APR
Cost per 2 weeks: No maximum
Criticism of Payday Loans
Opponents criticize the cost of PDLs as being “too high”. They use “Annual Percentage Rate”, or APR, to judge the cost. However, even when judged on an APR basis, PDLs are neither the most nor least expensive form of credit. Nor do customers care what the APR is. They care about the flat price. A customer will never ask, “What’s the APR”? They will ask, “What’s the price”? They want to know how much, in dollars, they will need to repay.
Martino denies that payday loans are “better than…bank overdrafts and late fees”. Well, they are! Ever paid a late fee? Ever bounced a check and gotten hit with the $30 NSF fee and $30 merchant fee? And that’s what you pay no matter how small the amount of the NSF! What planet is Martino living on?
Opponents like Martino claim that users of PDLs “often” get “trapped in a cycle of debt”. Yet, 94% of all payday loans are paid back on time, as reported in the SEC filings of public payday loan companies.
Martino’s other arguments are absurd in the extreme, and revelatory of someone who has never needed a payday loan, never entered a store, never talked with lenders, never talked with borrowers, and never read a single credible study.
He claims, “Payday lenders set up shop in some of our state's poorest communities.” In truth, they set up shop in the areas where their services are most likely to be needed. Does Martino think setting up a payday loan store in the richest community in town would make for good business? Guess what? There’s also a reason those evil fast food restaurants set up shop next to freeway exits.
Martino says, “They attract folks who have no money, no savings and, often times, little-to-no credit.” That is the point of short-term credit, to offer credit to those who need it and who have limited options. Would you offer unsecured short-term credit to someone who has money, lots of savings and great credit?
The silliest remark, for which Martino offers no evidence, is that “Financially strapped customers borrow an amount they must pay back in two to four weeks, and then they borrow and re-borrow that same amount for years.”
No, they don’t. The recent study by the Pew Charitable Trust showed that the average borrower takes out about 8 loans per year. There is a need for short-term credit, made even more necessary by stagnant wages over the past few years. And if people choose to use that credit, why does Martino care? His assumption is these people are stupid when, in fact, every credible study ever released shows they know exactly what they’re doing. People shop for credit like they do any product.
Martino claims borrowers would be “better off without it”, and yet ignores the Donald Morgan study out of the NY Federal Reserve, and a litany of other studies, that show that restricting credit pushes people to products they had already rejected, and it always costs them more.
He also claims, “Payday lenders also go to great lengths to restrict repayment plan options”, when in fact most states require these payments plans, and members of the industry trade association are required to offer them. Martino doesn’t understand that a lender wants a customer who pays back the loan, not one who renews it several times, ends up defaulting on principal, and who must subsequently be chased down for collections.
This is the problem payday lending faces – ignorant people spouting off about something they have no knowledge of. But hey, I’m sure Martino just regards me as being on the industry payroll. Should I assume, therefore, that he is on the payroll for the Center for Responsible Lending?
I think readers can guess what the truth is here. Payday loans aren't bad. What they are is a CHOICE. Freedom = choice. Martino wants to strip people's freedoms away because HE thinks something is bad. How about this instead? How about if Martino comes up with a competing product to payday lending? If he can make it profitable, I know firms that will fund it.
I'm not holding my breath.
- Lawrence Meyers