PAYDAY LENDING: DO OUTRAGEOUS PRICES NECESSARILY MEAN OUTRAGEOUS PROFITS?

Fordham Journal of Corporate & Financial Law, 2007 by Huckstep, Aaron

Outside of demographics, the study also provides some insight into borrowers' feelings regarding the availability of credit and the payday lending option. For instance, over 82% of responding borrowers agreed that most people benefit from the use of credit.111 But almost 72% agreed that the government should impose an interest rate cap on lenders, even if it means that fewer consumers will benefit from the credit.112 Just over 92% of respondents felt that payday lenders provide a useful service,113 although more than 75% also felt that the government should limit their fees.114 Finally, over 91% of respondents reported using some other form of consumer credit-nearly 10 percentage-points higher than the average population.115

The researchers conclude that payday loan borrowers base their decisions on the ease of the process, the ability to obtain fast approvals, and the convenience of the store location.116 It is important to note that this list does not include the cost of services, although two previouslydiscussed articles insinuated that cost was an important factor in the borrower's mind when selecting a payday lender.117

The Georgetown study seems to contradict the conventional wisdom. Based on this study, borrowers have multiple options for obtaining credit,118 but choose to use the payday lender even though they recognize that the fees are high.119 Borrowers also seem to be using payday loans as the industry intends,120 although almost a quarter of users do have a high number of payday loans per year.121 Overall, though, this study does not raise red flags regarding the service and charges provided by the payday lending industry.122 While users do feel like price controls would be valuable, this must be taken in context. For instance, it is likely that most people who buy gasoline for their car wish for the government to place a cap on the price of a gallon of gasoline, simply because it would benefit them.123

In 2001, the North Carolina Banking Institute published an article that indicates a more alarming trend among payday borrowers. According to the article, a Wall Street Journal industry analyst claimed that the average borrower "makes 11 transactions [per] year."124 Another study indicated the average was 10 transactions per year.125 Similarly, one other study indicated an average of over 12 times per year.126 In 2005, another article indicated that, in Illinois, 20% of borrowers take out 20 or more loans per year.127

Experience in Colorado calls into question the Georgetown results, and lends credence to the North Carolina Banking Institute figures. In 2000, Colorado enacted the Deferred Deposit Loan Act as an attempt to combat the "high-cost" payday loan.128 The regulations required payday lenders within the state to collect and report demographic data regarding borrowers.129

Based on data collected between July 2001 and December 2004, the demographics of payday borrowers in Colorado indicate that the typical borrower was a 36 year old single woman making just over $28,000 per year.130 Sixty-two percent of borrowers were between the ages of 20 and 39 years old, and 55% were women.131 Married borrowers accounted for 47% of the total loans, and more than 22% of borrowers had been employed at their current job for less than six months.132 Sixty-three percent of borrowers made less than $30,000 per year, and only one-quarter of one percent, or 0.24%, made more than $50,000 per year.133 On average, the borrower took out just over 9 loans per year, from the same lender. This does not account for loans taken out from different lenders.134 Moreover, 20% of borrowers took out 16 or more loans with the same lender within a 12 month period.135 These repeat borrowers constituted over 46% of all loans written by a particular lender.136 Interestingly, 18.85% of loans were renewals, a figure that increased over the years analyzed from 19.56% in 2003 to 20.28% in 2004.137 Similarly, 34.4% of loans were rollovers.138 This figure has been increasing in recent years: 34.7% in 2003, and 37.48% in 2004.139 Based on this information, the study concludes that there is "a gaping disconnect between the theory and expressed purpose of payday loans . . . and their reality."140