It’s nice when someone takes the time to read an article and provide some thoughtful rebuttal. With the payday loan debate, it almost never happens. That’s because when the facts get thrown in the face of opponents, they slink away because they don’t have any actual rebuttal.

I turn now to Alan Krishnan’s reply to my Memo to Terry McAuliffe.

To begin, Mr. Krishnan perpetuates a myth regarding payday loan customers. He says, “The weakest of our weak end up taking payday loans”. This is false. Some 6 – 9 million Americans use payday loans annually, across a broad demographic:

Majority earn between $25,000 and $50,000
94 percent have a high school diploma or better
56 percent have some college or degree
68 percent are under 45 years old (only 3.5% are 65 or older)
Majority of customers are married
64 percent have children in household
42 percent own homes
57 percent have major credit cards
100 percent have steady incomes and checking accounts

Payday loan customers are, quite simply, the average working American. They are not “unsophisticated” as Mr. Krishnan claims. The term “unsophisticated” is really just a euphemism for what Mr. Krishnan won’t say out loud. What he means is “stupid”.

But a truly stupid person would utilize one of the more expensive options when a payday loan would serve them better. I have news for Mr. Krishnan: Americans are not stupid nor are they unsophisticated. They know how to shop around for a bargain. They recognize payday loans as a bargain, because they turned to them 154 million times last year. They could’ve used the other choices I presented, and many people did. But 154 million times, they chose a payday loan.

They chose it. They weren’t forced to use it. They entered into the transaction of their own free will. They understood the terms. They understood the fees. They made a decision, much as we all do, when faced with a decision about paying for a particular product.

“Is the price I am paying worth what I am receiving in exchange?”

We do it with televisions. We do it with refrigerators. We even do it with overpriced hot dogs at airport concession stands.

It’s no different with a payday loan.

“Is the fee of $15 per hundred borrowed worth the credit I am receiving in exchange?”

It’s a very simple cognitive process. It doesn’t even require that much “sophistication”. They asked the question in their minds and answered “Yes”, because the other choices weren’t palatable for one reason or another.

Customers are also a lot happier they chose a payday loan, because they saved themselves over $4 billion in overdraft fees and $6 billion in internet lending fees – which would be the only available credit options if Mr. McAuliffe has his way.

Remember, if you ban something, the demand doesn’t vanish. It just moves to another source to fill the need. We faced this issue before. It was called Prohibition. Remember what happened? People kept drinking. They just did it on the more expensive black market.

Mr. Krishnan asks, “why can there not be a central fund to make these loans at a competitive rate of interest?”

Why not? Because this fund would lose money hand over fist. Let’s assume that, rather than charging a fee of $32 per hundred (and it’s a fee, not interest), the “competitive interest rate” that Mr. Krishnan calls for is 36 cents per hundred borrowed. This article demonstrates why this central fund concept would literally lose billions of dollars annually. Therefore, private enterprise won’t touch it. Even the federal government under Obama isn’t stupid enough to throw money away like that.

However, if Mr. Krishnan can create a business plan that meets his goals, I’ll fund it. He’ll have a hard time doing this, though. Even Goodwill, a non-profit, tax-exempt charity, charges customers almost $10 per $100 borrowed (i.e., 252% APR) for their “Good Money” payday loan. Even though they are only trying to break even, Goodwill could not offer the product under a 36% rate cap. Heck, the Pentagon knows where armed forces members work, how long they’ll be employed, and have direct access to their paychecks – and even they can’t pull together a low-cost loan program!

Mr. Krishnan also asks, “Why can there not be a program to help people get out of this cycle of debt? Sadly, this program makes one borrow regularly, because most paychecks are gone to paying back the previous pay period’s payday loan! ” Again, this is false. 94% of loans are paid back on time. Also, the “payday loan cycle of debt” situation happens to an unfortunate minority who are either dealing with the few bad apples that exist in the industry, or who haven’t simply asked their lender for a payment plan. Companies that are members of the Community Financial Services Association offer these plans. Any reputable lender would because he would much rather get his principal back than have the borrower ultimately default and have to chase him down to get it back!

Mr. Krishnan also seems to believe that only lenders shoulder responsibility in a transaction. I’d ask Mr. Krishnan why he doesn’t believe that borrowers aren’t capable of being irresponsible, also? Certainly we’ve learned that the mortgage industry was driven by greed, and money was lent to people who had no business taking out mortgages. But what about those borrowers? Does Mr. Krishnan honestly believe that all borrowers were so “unsophisticated” that they didn’t know they couldn’t afford to take out a mortgage? That an adjustable rate is called “adjustable” because it will go up, making payments higher?

Borrowers are half of the transaction. They must behave responsibly, too. The system collapsed because of borrower greed, as well. People saw housing prices skyrocketing and wanted to get in on the action. They wanted to own a home even if they couldn’t afford it.

Mr. Krishnan also says, “ Time has shown this is not in any one’s interest, and it is the worst form of exploitation.” This is a profoundly ignorant and insulting statement. I am willing to bet that Mr. Krishnan has never used a payday loan, never visited a store, and never talked to any customers. I encourage him to do so. There is a real-world education to be had there.

(This is, by the way, one of the huge problems with this topic. A lot of opponents like to emit opinions without ever experiencing how things work in real life.)

Payday loans are in the public’s interest. Hundreds of billions of dollars in credit has been extended to people when they needed it the most. They’ve used this money to pay for doctor’s visits, to repair their cars so they can get to work, to help fund the purchase of a modest wedding ring, to pay a utility bill, to fill up their gas tank when fuel was selling at $4 a gallon, to buy an air conditioner for a stifling bedroom – the list goes on and on.

If Mr. Krishnan is looking for exploitation, he should look at banks and credit unions, which charge $27 in overdraft fees for an average overdrafted transaction of $60. You can get a $60 payday loan for only $9.

The other exploitation going on is by grandstanding politicians like Terry McAuliffe, and Matt Lundy of Ohio. They are literally handing customers over to the banks and credit unions by trying to kill payday lenders. It’s all done to feed their own ego. To get elected. To trick the 95% of Americans who have never even heard of payday loans to fall for the repeatedly-debunked “loan shark” argument.

Yet, Mr. Krishnan believes Mr. McAuliffe is a “Virginian with courage to take on anyone hurting Virginians”. I guess that means he’ll be punching out every mirror he passes in front of.

Lawrence Meyers can be reached at pdlcapital@earthlink.net

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