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Payday loans and a little learning

[Mar 2, 2009.]


California's payday loan industry was last week the subject of an unusually vehement attack piece in the Los Angeles Times. The writer, a professor at the University of Southern California, went so far as to call payday lenders 'bottom-feeders'.

The professor actually made some good points about the number of people in Los Angeles who do not have bank accounts (the 'unbanked, as he called them), and some of the financial challenges facing them. He highlighted, for example, that the area has a particularly high percentage of individuals without accounts, and that they are very likely to be immigrants or members of disadvantaged ethnic minorities.

The piece quotes a 2006 study by the Brookings Institute that found that more than two-thirds of LA residents without a bank account worked steadily.

Banks can be good
His argument that the unbanked would be better off if they had access to a fuller range of financial services was measured and sensible. However, he appeared to make a substantial leap when he came to criticize payday loans.

The professor seems to think that those who have bank accounts do not need access to other financial services. Yet anyone who has a bank account who faces a non-sufficient funds (NSF) charge would be much better off taking out a payday loan than paying the bank fees.

Payday lenders can be better
The Community Financial Services Association, a payday lenders' body, says that a typical payday loan attracts an APR (annual percentage rate) of 391 percent. It quotes, however, an FDIC report that says that: "…the average bank customer pays $27 (median overdraft fee) to cover a transaction of $36 (median transaction size), with annual percentage rates ranging from 1067% to 3520%."

Meanwhile, according to Bretton Woods, a bank strategy consulting firm: " An estimated 20.2 million households with bank or credit union accounts write the majority of NSF items (1.02 billion) incurring $29.7 billion in NSF fees or approximately $1,472 in fees per active household."

So, perhaps the professor was wrong to think that banks would be the saviors of those who use payday loans. In reality, it is payday lenders who can save bank account holders a small fortune.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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