Payday Loans and the Misappliance of Science

[May 7, 2009.]

 

Every once in a while, something is published that is so breathtakingly outlandish that intelligent readers can only rub their eyes in disbelief. One of these, about payday loans, appeared yesterday.

Payday Loans Disappearing in Virginia

Actually, quite a lot of the piece was perfectly sensible. It reported that several lenders are closing down in Virginia because payday loans legislation that was approved last month has made their operations in the state uncommercial.

The new interest rate cap imposed by the General Assembly means that a payday lender in the state who advances $100 for two weeks now receives $1.38 to cover wages, rent, power, taxes, lost interest and profit. That also has to cover defaults.

The Geography of Payday Loans

The article only entered some sort of alternative universe when it quoted a professor whom it described as 'a payday loans expert'.

According to the report, this geography teacher is alleged to have said: "They [payday loans outlets] locate themselves among the desperate, and that's what makes them predatory. If they were evenly distributed, and they were a product that everyone could enjoy, then their site location strategy would be to spread out."

Isn't this a little like accusing doctors of being predatory because so many of them are clustered in hospitals and clinics--where there are lots of, er, sick people? Does it not make as much sense to criticize Home Depot for not opening a store on Rodeo Drive in Beverly Hills?

Payday Loans Stitched Up

Would the professor be comfortable saying: "They [Louis Vuitton outlets] locate themselves among the super-rich, and that's what makes them predatory. If they were evenly distributed, and they were a product that everyone could enjoy, then their site location strategy would be to spread out."

For how many years can one study geography before noticing that purveyors of hand-stitched luggage tend to locate their stores near where their customers live? And that those who make payday loans locate their outlets so that they're similarly handy for their target market?

Neither is necessarily an indicator of predation.

Consumer Groups to Open New Payday Loans Outlets

Just kidding. Of course, critics of the payday loans industry frequently claim that it is easy to make a profit on revenues of $1.38 per $100 two-week loan--or 36 percent APR. For example, Texas state Senator Wendy Davis reportedly remarked recently about the payday loans industry: "I don't think they can look anybody in the face and say, 'We can't make a profit at 36 percent.'"

And yet--so far--remarkably few of these critics have decided to take advantage of this tempting business opportunity.

 

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.