Given the reply to my last article on payday loans (PDLs), which can be found through this link and going to the fourth comment at the bottom, I thought I should reply. It appears I misunderstood Mr. Krishnan in a few places. He also perpetuates more myths about PDLs that need to be corrected.

Mr. Krishnan’s thesis appears to be this: Many people are living paycheck to paycheck; sometimes they need to borrow money but they should have more discipline instilled in them to avoid borrowing at all; that PDLs facilitate their ability to make their situation even worse; that they aren’t “sophisticated” enough to understand what the borrowing does to them; and that they are stupid for taking out a PDL more than an arbitrary number of time over an arbitrary period. The solution is to support a politician (Terry McAuliffe) who calls for a ban on payday loans.

Mr. Krishnan is correct on the first two counts of his thesis, but wrong on all the rest. Here’s why:

I originally replied to his notion that only the “weakest of the weak” use payday loans by showing the PDL demographic is the average American. Mr. Krishnan apparently was referring to the idea that, since that demographic is often unable to significantly increase their take-home pay, that they will always have a need for short-term credit.

Fair enough. While I agree that many members of our society will have limitations as to their maximum take-home pay, all that does is prove my point — that short-term credit is a vital necessity for this demographic. Banning PDLs will only harm them — forcing them to more expensive options.

Mr. Krishnan, however, appears to be arbitrarily deciding how many payday loans someone should be able to take out in one year. He says, “The point of concern is when any one takes more than four such loans in a year”.

Why four? Why one year? Why did he choose those specific numbers? We can’t say because he provides no reasoning before rendering this judgment. Because his pronouncement is arbitrary, it is also rendered meaningless. Indeed, why should anyone — especially government — say how many loans a person can take out in a year, any more than how many Big Macs or shots of tequila one may consumer in any given period?

Mr. Krishnan has a low opinion of American society, and uses this opinion as the basis for most of his arguments against payday loans. He declares, “the average working American is not sophisticated”. I wonder how most Americans would feel, being insulted in this manner? Since Mr. Krishnan took me to task for interpreting his writing in a manner other than which it was intended, I suppose I should ask for clarification. However, since he insists that he does not mean “stupid”, I can only turn to the dictionary for the defintion of “sophistication”. This is defined as, “having worldly knowledge, lacking naivete”.

I don’t know where Mr. Krishnan gets off insulting Americans like this. It’s an opinion he’s entitled to, but since he provides no basis for his opinion, one must take it at face value — again rendering it meaningless.

Mr. Krishnan says, “If you took 10 payday loans in six months, I would have no hesitation stating that your action is probably stupid.”

Mr. Krishnan renders judgment upon a person’s actions without knowing that person’s circumstances. The action is what it is — the borrowing of money. Milton Friedman reminds us that people, when left alone, are the ones most capable of making the right decisions for themselves. Who is Mr. Krishnan to pronounce the action of taking out an arbitrary number of loans in an arbitrary numbers of months as being “stupid”?

Mr. Krishnan somehow extrapolates that using PDLs are a good option for some to the suggestion that they are right for everyone. I never implicitly nor explicitly stated such a thing. He talks about how his finances are easily managed through credit cards and lines of credit. Good for him. Does he believe that everyone has those options? If not, why call the behavior of someone who chooses a payday loan “stupid”?

Mr. Krishnan says, “You have a great talent for using statistics in support of your pet theory, and vested interests. If you want to flaunt that they turned to them [PDLs] 154 million times last year, why do you not talk of the billions of times every week that folks turn to credit cards? By your own admission, the incidence of payday loans is insignificant in the big picture of the unsecured loans industry, does that reflect on their popularity?”

I’m not sure what pet theory he is referring to, other than the fact that payday loans are the best option for some people, some of the time. The fact that they were used 154 million times last year does not invalidate the viability of other options. It just points out that PDLs are a popular product, and people used them in spite of there being other choices.

Mr. Krishnan demonstrates further ignorance about PDLs, “Explain this: For some one making $24,000 a year, with a paycheck of about $750 every two weeks (and say about $1,600 every two weeks for some one making $50,000 a year) the payday loan will vary between $500 and $1,600. Right?”

Wrong. The most generous PDLs will not loan more than 25% of gross salary, so the range is actually $188 to $400.

Mr. Krishnan furthers his incoherent stance by misinterpreting my analogy. I said that American consumers are not stupid. They will compare the costs of various products and choose the one that offers the greatest value at the lowest price. Payday loans are no different from any other consumer product in that respect.

But he says they aren’t the same because refrigerators and hot dogs are not purchased as often as payday loans. His analogy is false. I do not refer to the frequency of PDL usage, I refer to the behavior of the customer in shopping for the best price.

Mr. Krishnan makes another false statement, and this one is huge, further demonstrating how little he understands of the short-term credit market. I told him that people choose payday loans over other options because the other options are unpalatable for one reason or another. He falsely asserts, “No, they did not chose payday loans because the other choices weren’t palatable for one reason or another – they just did not have another choice!”

There are other choices, which I’ve outlined many times.

Further mistakes made by Mr. Krishnan: “With the high rates of repayment on payday loans…there is no way any lender will lose [on the PDL business model].”

Of course lenders can lose. Three things can happen that can kill PDLs:
1) Rising expenses
2) Increase in defaults
3) Paternalistic legislation that unreasonably caps rates

He says, “Sadly, this program makes one borrow regularly, because most paychecks are gone to paying back the previous pay period’s payday loan! ”

No, PDLs do not make anyone do anything. People are not controlled by things. People control their own lives. However, if they put themselves in situations where they give up that control, that is on them. If they choose to use drugs, then the drugs will control them. If they choose to take out a loan that they are not 100% certain they can repay, then they should not take out that loan.

Mr. Krishnan continues to decry borrower responsibility. “You ignore that most of these borrowers cannot afford [even] a payment plan – they need every penny to pay their bills and put food on the table, and THAT is why they go back a week later and take another payday loan!”

Not true at all. 94% of PDLs are paid back on time. If they cannot even afford a payment plan, then they should not have taken out the loan in the first place.

Mr. Krishnan’s judgment continues. “When some one borrows to pay rent, put food on the table or get their car fixed, they are desperate. At all other times, they are being irresponsible – unless the loan is an investment for their home, education, automobile or other asset.”

At all other time they are being irresponsible? Says who? The fact that somebody may find themselves in an emergency situation, not of their own doing, makes them irresponsible?

So now we return to his thesis. Let’s review it, with my conclusions.

1) Many people are living paycheck to paycheck; True
2) Sometimes they need to borrow money but they should have more discipline instilled in them to avoid borrowing at all; Partially True. Sometimes, emergencies arise.
3) PDLs facilitate their ability to make their situation even worse; Only if used irresponsibly, which only a small minority do.
4) That most people aren’t “sophisticated” enough to understand what the borrowing does to them; FALSE. Most people know exactly what they are doing, why they are doing it, and what the consequences are.
5) People are stupid for taking out a PDL more than an arbitrary number of time over an arbitrary period. FALSE
6) The solution is to support a politician (Terry McAuliffe) who calls for a ban on payday loans. FALSE All this will do is force people to more expensive options.

Where we do agree is Mr. Krishnan’s call for the public to take better control of their finances. I am a big advocate for a personal finance course to be required in the senior year of high school in every state. But for Mr. Krishnan to state that PDLs are not in the public interest is to deny reality. There is a need for them. Eliminating them will hurt consumers. I suppose, in a perfect world, we’d never have need for them. But we don’t live in Paradise, do we?

Finally, Mr. Krishnan says, “The key is to get more jobs, and get all our people gainfully employed. McAuliffe is our best candidate to bring jobs to Virginia.”

It’s an ironic statement, considering that if McAuliffe gets his way and payday lenders are banned, 1,500 people will lose their jobs.

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