A report by the Pew Charitable Trusts contradicts House Speaker Gordon Fox's view that clamping down on payday loans would push desperate borrowers to worse alternatives.
But Pew offers this information as part of a study done last year:
What Would Borrowers Do Without Payday Loans?
If faced with a cash shortfall and payday loans were unavailable, 81 percent of borrowers say they would cut back on expenses. Many also would delay paying some bills, rely on friends and family, or sell personal possession
When presented with a hypothetical situation in which payday loans were unavailable, storefront borrowers would utilize a variety of other options. Eighty-one percent of those who have used a storefront payday loan would cut back on expenses such as food and clothing. Majorities also would delay paying bills, borrow from family or friends, or sell or pawn possessions. The options selected the most often are those that do not involve a financial institution. Forty-four percent report they would take a loan from a bank or credit union, and even fewer would use a credit card (37 percent) or borrow from an employer (17 percent).
Advance America (see below) is responding to Pew's findings.
Pew also found that in states where "legal protections" are enacted, "the result is a large net decrease in payday loan usage":
In states with the most stringent regulations, 2.9 percent of adults report payday loan usage in the past five years (including storefronts, online, or other sources). By comparison, overall payday loan usage is 6.3 percent in more moderately regulated states and 6.6 percent in states with the least regulation. Further, payday borrowing from online lenders and other sources varies only slightly among states that have payday lending stores and those that have none. In states where there are no stores, just five out of every 100 would-be borrowers choose to borrow payday loans online or from alternative sources such as employers or banks, while 95 choose not to use them.
Fox's office did not respond to a request for additional comment by the time of this post.
Bob Plain has more on payday lending and alternatives.
UPDATE: Jamie Fulmer, a senior VP with South Carolina-based Advance America -- the firm that employs former House Speaker William Murphy to lobby in Rhode Island -- got in touch Friday to offer some criticism of the findings in Pew's report. Here's an excerpt:
Specifically, “Payday Lending in America” fails to present other popular short-term, small-dollar credit options considered by consumers and regulators to be comparable to payday loans, such as overdraft protection, and to offer findings from Pew’s own body of research on these other credit options.
Had Pew chosen to incorporate its own findings from their studies on checking account fees and terms and overdraft protection, it would have realized that for many consumers, a payday loan can be a sensible solution. A payday loan is a cost-competitive, simple and reliable form of short-term, small-dollar credit. When offered by a regulated lender like Advance America, a payday loan often provides greater transparency and straightforward disclosure than other credit options.
Further, Pew fails to consider the unintended consequences of overly restrictive regulation. These regulations, while meant to protect consumers, do nothing to address their need for credit and simply leave them with little choice but to turn to costlier, less regulated credit options.
- A 2011 study by the Federal Reserve of Kansas City concluded that that without access to payday lending due to such regulations, consumers may have limited ability to maintain formal credit standing, have inadequate access to credit, or may seek more costly credit alternatives.
- A Federal Reserve Bank of New York study reported that people "bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 ('no asset') bankruptcy at a higher rate" after payday lending was banned through interest rate caps in Georgia and North Carolina.