I have never taken out a pay-day loan. I have some savings and a steady income (a bit steadier, I might add, now that there is a tentative agreement between the faculty union and UWO), and I am able to budget fairly carefully, so I don't feel the need for pay-day loans. But I can readily understand that for some people, given their particular situations and credit ratings, a pay-day loan might come in handy and might be preferable to any other realistic options (see below).
I have only a limited idea about what all the options are that might be available in the marketplace. I do know, though, that several sites (see here and here) offering a payday loan or cash advances help sponsor this site, for which I thank them.
I have always been skeptical of claims that pay-day loan companies exploit the poor. I'm sure there are information imperfections and transaction costs, but entry into this industry is relatively easy. Consequently, one would expect that over time, firms will compete on the basis of both service and price, especially now that internet options are available, too. Thus it should be the case that profits for these firms are driven down by competition to reflect only normal rates of return (given the expected risks involved) on average. This expectation, based on textbook economic theory, seems relatively realistic. From Wikipaedia,
A study by the FDIC Center for Financial Research found that “operating costs are not that out of line with the size of advance fees” collected and that, after subtracting fixed operating costs and “unusually high rate of default losses,” payday loans “may not necessarily yield extraordinary profits.” Based on the annual reports of publicly traded payday loan companies, loan losses can average 15% or more of loan revenue. Underwriters of payday loans must also deal with people presenting fraudulent checks as security or making stop payments.
Indeed the growth of the industry suggests that firms in the industry are both providing a valuable service to their clients and facing increasing competition.
A staff report released by the Federal Reserve Bank of New York concluded that payday loans should not be categorized as "predatory" since they may improve household welfare. "Defining and Detecting Predatory Lending" reports "if payday lenders raise household welfare by relaxing credit constraints, anti-predatory legislation may lower it." The author of the report,Donald P. Morgan, defined predatory lending as "a welfare reducing provision of credit." However, he also noted that loans are very expensive, and that they are likely to be made to under-educated households or households of uncertain income.
Other studies have questioned this claim. Petru Stelian Stoianovici, a researcher from The Brattle Group, and Michael T. Maloney, an economics professor from Clemson University, found "no empirical evidence that payday lending leads to more bankruptcy filings, which casts doubt on the debt trap argument against payday lending."
And here are some interesting comparisons. Whether they are relevant might be open to question, but for people seeking payday loans they might be VERY relevant:
Other options are available to most payday loan customers. These include pawnbrokers, credit union loans with lower interest and more stringent terms, credit payment plans, paycheck cash advances from employers, bank overdraft protection, cash advances from credit cards, emergency community assistance plans, small consumer loans and direct loans from family or friends.
Payday lenders do not compare their interest rates to those of mainstream lenders. Instead, they compare their fees to theoverdraft, late payment, and penalty fees that will be incurred if the customer is unable to secure any credit whatsoever.
The lenders therefore list a different set of alternatives (costs expressed here as APRs for two-week terms):
- $100 payday advance with $15 fee = 391% APR;
- $100 bounced check with $48 NSF/merchant fees = 1,251% APR;
- $100 credit card balance with $26 late fee = 678% APR;
- $100 utility bill with $50 late/reconnect fees = 1,304% APR.