I spoke with Dr. Stephen Graves, Ph.D. today regarding his opposition to payday lending. Besides the usual arguments over the value of the product, the conversation helped articulate the position of those opposed to payday loans. It also speaks to the conflict between the Idealism of people like Dr. Graves and the Pragmatism that I and the PDL industry preach.

Now I must be fair, in that I caught Dr. Graves off-guard, unprepared to deal with the pit bull I can be on the topic. And I give him credit for even talking. He’s in the 2% that was willing to even talk. Most just run for cover.

Over at his website, he’s conducted some impressive and exhaustive research regarding payday loans. Good for him – he did his digging and should be commended. You can read those reports and make your own judgments. His angle focuses on the alleged social cost of payday loans.

From my reading, I believe he reaches some fair conclusions, and some that are outright incorrect. His interpretation of Scriptural references to usury, and its relation to payday loans are just that….interpretations, and not traditionally-held ones. His charts showing the number of Starbucks and McDonald’s in relation to payday lenders merely demonstrate relative demand for unrelated products. The claim that the vast majority of borrowers do not pay back on time is false.

No big surprise — Dr. Graves has an agenda, as we all do. The use of hyperbole and pejorative adjectives towards the payday loan industry demonstrates his bias, which needlessly undermines the work. An academic paper should not render judgment, but simply present the data and conclusions and form a policy position. I refer readers to Richard R.W. Brooks’ “Credit Past Due” paper out of Columbia Law as an example.

Okay, so what? So Dr. Graves wants payday loans driven out of town. He thinks it would be better for society. I don’t. This led to a discussion of alternatives – because we can both spout from our respective ivory towers, but it’s the real world that matters.

Okay, so no payday loans. I asked what alternatives he would suggest for people in need of short-term credit.

“Get a credit card,” he said. When I pointed out that 1) Not everyone can get one, 2) that we all know the dangers of credit cards, which have proven histories of creating debt cycles, and 3) that a default harms a borrower’s credit rating, he said, “You’ve got a point”.

My respect for him doubled. He’s intellectually honest.

So what other choices exist? Bounced checks and overdraft protection? He came out against that, as he should. They’re worse than any other option.

What are we left with? He suggested getting a loan from a credit union. We didn’t get into that option, but credit unions are not the do-gooders everyone believes them to be, because 1) they also drive customers to overdraft protection programs, 2) generate most of their net income from NSF and overdraft fees, 3) not everyone has access to credit unions.

Next? “Borrow from a family member”. Well, everyone knows that would be the cheapest route, but 1) credit isn’t always available, 2) it may come with psychological, emotional, and social strings, 3) A default here is arguable the most socially expensive – a damaged family relationship – the exact thing those in need of credit are also most likely to need on a regular basis.

And let’s say all those alternatives were eliminated. What then? “People would just have to do without. What did people do in the early and middle 20th century before any of these products? They did without. They walked to work if their car was broken”.

Interesting thought, I have to admit. If all credit options were eliminated, would people simply learn to live without? I doubt it. The world has not remained a constant. We live in sprawling urban and rural areas.

Walk to work? Forego a visit to the doctor? Let the utility company shut off the power?

Really? Do I need to spell out the myriad problem associated with that line of thinking?

So it looks like every alternative has problems. Dr. Graves admits there are other problems associated with using credit cards or bouncing checks. We didn’t dig into the downside of family/employer loans, but I hope he sees the downside there. And ‘doing without”? Maybe in a few limited instances, but there’s no way it’s going to make up the difference.

Certainly from an Idealistic perspective, it’s unfortunate that people must sometimes rely on credit. And there is an argument that if people know a credit option is available, they are more likely to use it than find ways to avoid it. The Idealist would want the option removed altogether so they will reform their financially irresponsible life. The Pragmatist recognizes that it just isn’t possible. Real life demands that we need that extra cash from time to time. Eliminating the option will harm more than help.

Where does that leave us? You know my position. Choice is good for the consumer. Payday loans are neither the least nor most expensive option. Eliminating it makes things worse.

Here are my challenges and offers to Dr. Graves.

1) You are welcome to send in a rebuttal which I’ll post here unedited. I’d like you to focus on real-world solutions to this issue.
2) Since we live close, let’s go together and visit a couple of payday loan stores. We’ll talk to managers and customers and hear what they have to say.
3) Then you take me somewhere to show me something reflecting your position on payday loans. Lunch is on me.
4) We’ll both write an article discussing what we learned.

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