Me neither, but if you have sympathy for payday borrowers, you need to be concerned about payday lenders. Here’s the reality: Payday borrowers borrow from payday lenders because those borrowers don’t have better options.
According to a recent Federal Reserve Board study, 40% of American adults cannot afford an emergency expense of $ 400. While many of that 40% may have included overdraft protection on their checking accounts, or the ability to get credit card cash advances or personal loans from their banks, these options are not. available to others.
Additionally, a Federal Deposit Insurance Corporation report found that more than 20 million people live in unbanked households. That is, they don’t have a check or a savings account. The limited options available to these households are not improved by eliminating one of the few that are available. This is where wishful thinking doesn’t come in so much. There is no ruby heel rattling or wand shaking that turns unbanked households into banked households or increases anyone’s savings when rate caps stop payday lenders.
In fact, the data shows what common sense would predict: Things get worse for borrowers when they have fewer options.
An article in the Journal of Law and Economics reveals that payday borrowers don’t move on to better options when payday loans are excluded. On the contrary, researchers find that these borrowers with limited options resort to worse choices. In states that banned payday loans, borrowing from pawn shops was 60% higher than in states that did not ban payday loans. Another, even more worrying finding is the level of involuntary checking account closings – a financial death penalty. The study’s authors estimate that the payday loan ban triples the number of such involuntary closings.