Payday Lending

Transcript

New research checks in on the twenty-eight billion dollar payday lending industry.

From the University of Kansas, this is Research Matters. I'm Brendan Lynch.

Offering loans fast for no collateral but a personal check, payday lending has sprawled to about twenty-five thousand loan shops in the U.S. Now, Robert DeYoung, a professor at the University of Kansas School of Business, has carried out some of the first research on this controversial new type of credit.

DeYoung: "The typical payday borrower is middle class or lower middle class, has a job, has a bank account, is short on cash. And this is probably because he or she has gone through their credit card borrowing limit and has no money in their bank account. A payday lender is probably the last, best source of cash for them."

But critics charge that many payday lenders exploit financially naive borrowers with huge interest rates. DeYoung agrees, rates are often sky high.

DeYoung: "If you calculate the price charged for payday loans as an interest rate, it sounds like an astronomical price. The typical payday loan has been about $300, and the fee for that loan is $50. That’s one-sixth of the loan. If you calculate the annual percentage interest rate, that comes to about 450 percent."

Why do people agree to such terms? DeYoung says the instant credity of a payday loan can sometimes amount to a good deal for borrowers.

DeYoung: "Put yourself in the position of a household who has a car that needs to be repaired, and if you don’t repair the car you’re going lose your job. If you borrow $300 against your next paycheck — and it costs you $50 — that may work out to a 450 percent annual interest rate. But that’s not a bad price to pay for not losing your job."

However, DeYoung's work shows the vast majority of payday loans go to chronic borrowers, not one-time consumers.

DeYoung: "The trouble is that households get in a position where they cannot pay the loan off and they have to roll it over. And if you roll over a $300 loan at a 50 percent fee six times, you’ve just paid $300 to get a $300 loan."

For more on payday spending, log on to Research Matters DOT K-U DOT E-D-U. From the University of Kansas, I'm Brendan Lynch.

Tell Me More

KU researcher checks out controversial payday lenders

LAWRENCE — With lures like “Cash Loans,” “No Credit Necessary” and “Big Cash Advance,” storefront signs across the nation now advertise the promise of easy money. This is the face of the payday lending industry, which has sprawled to encompass about 25,000 loan shops and $28 billion in annual loans in the United States, according to the Center for Responsible Lending.

Read the full press release