Dear Mr. Muhammad:
Iâ€™d like to offer a few comments regarding your article on payday loans. I have been on all sides of this business for 8 years â€“ as journalist, financier, public policy commenter, at the store level, at the corporate level and, yes, even as a borrower.
I want to agree and compliment you on the most important aspect of your article. You say, â€œHowever difficult, the only path forward is to reconcile your cost of living with your income by evaluating areas where you can cut costs and make the most of your income. This means scaling back on extras and creating a long-term, sustainable budget that enables you to invest in your future.â€ I would advocate for every state to mandate a financial literacy and planning class for every high school senior. Americans are woefully undereducated on economics and personal finance.
I also agree that in times of financial distress, short-term credit is a necessity and where possible, people should carefully evaluate all their options. This includes, as you suggest, getting a loan from friends or family. Of course, there are risks involved there as well â€“ such as complicating a precious relationship.
I must disagree with you, however, regarding a few statements you made regarding payday loans. You have chosen to rely on the Center for Responsible Lending as a resource for information. However, this organization has repeatedly issued false statements regarding payday loans, including studies riddled with bias. The CRL is an arm of the Self-Help Credit Union, which has for years been trying to push payday lenders out of business so that they could capture that client baseâ€¦and charge them their own form of short-term credit, which include overdraft fees that are vastly in excess of payday loan fees.
Payday loan centers do not â€œtend to concentrate in minority neighborhoodsâ€. There are several studies that run counter to this assertion. You may be interested also in a survey of over 2 million unique visitors to payday loan websites. This data showed that 57% of borrowers were Caucasian vs. 30% African-American, which is consistent with storefront data.
I challenge your assertion that, â€œPayday lenders regularly mislead their customers by advertising their fees as a dollar amount rather than an APR, or annual percentage rate.â€ How can it be misleading to tell people the exact actual dollar amount they are spending for a product? Borrowers respond to the flat price signal of the product and not the APR, as you suggest. Furthermore, payday lenders are required to disclose APR under federal law. Thus, that information is still available for the outlier who somehow feels they should measure the rate on an APR basis. To that end, ask yourself this: when you get dinged for a $2 ATM fee on a $200 withdrawal, do you scream about the 36,500% APR? No, you scream about the two dollars.
You also claim that â€œborrowers take an average of 5 â€“ 8 months to pay back their loansâ€. This is patently and provably false. SEC filings of public payday loan companies unequivocally show that 94% of loans are paid back on time, a figure confirmed when comparing bad debt expense to total principal lent. Furthermore, most states cap the number of rollovers that are permitted. Certain chains, such as Advance America (the largest in the US) do not permit rollovers. Finally, members of the trade association (CFSA), may only rollover a loan the lesser of four times or what state law permits.
The only possible reason a loan takes months to pay back is if a borrower has chosen to do business with a bad player (they exist, just as bad auto mechanics do), or if they have been granted an extended repayment plan, which all CFSA members offer.
I hope I have cleared up some misconceptions regarding payday loans. I encourage you to continue the discussion and preach financial responsibility
PDL Capital, Inc.