Lise Olsen’s 11/27 article in the San Antonio Express News misleads legislators and readers regarding payday loans (PDLs). Olsen and legislators should ask, “Why do people use these products when it is seemingly so expensive”? The facile answer: borrowers are stupid and make costly mistakes, resulting in the alleged “cycle of debt”. Yet people don’t repeat costly mistakes. So why do 12 million Americans use PDLs, and return to them?

Because they are really stupid? No.

Because it’s the best choice for them.

Borrowers know what their choices are, and the OCCC reported 800,000 consumers chose PDLs over the following (cost per $100 per 2 weeks):

Borrow from a friend/employer ($0)
Credit Card Advance ($1)
Installment Loan ($3 – $8)
Pawnbroker ($9)
Title Loan ($10 – 12)
PDL ($15 – 23)
Online PDL ($25 – 30)
Bank overdraft fees ($40)

Legislators must not force people to a worse choice that they have already rejected. Instead, they must recognize demand, give borrowers credit for their intelligence, and work with industry leaders to get bad lenders in line.

Legislators must also ask, “Why do opponents want to punish businesses that are providing a popular, necessary product?”

The reason often cited is the “cycle of debt”. The image conjured by the media is of some poor soul – a minority or elderly person — who renews a loan over and over for months, defaults, and gets sent to collections.
Does this occur as often as opponents want legislators to believe? Rarely. The OCCC’s reports showed that 36% of borrowers pay their initial loan back on time, and 50% of borrowers renewed their loan once. The remaining 14% renew their loan an average of 2.4 times.

A bell curve portrait of OCCC data reveals a tiny percentage at the curve’s far end, a sliver of that 14%, who fall in with a bad lender or need to plan their finances better. No legislator will ever pass a law that prevents the occasional person from making the occasional bad choice, and that includes buying lottery tickets or drinking too much alcohol.

The solution for this tiny demographic is financial education. How about a state-mandated class in personal finance for high school seniors, or working with PDLs to offer financial education with each loan? Why punish the business instead of attacking the underlying problem?

Legislators must be vigilant for incomplete messaging from the media and “advocacy groups”. Why does the media always find that one unfortunate borrower yet never interviews the 90% of customers who are satisfied with PDLs, as indicated by a George Mason University survey?

Legislators should examine the motives of “advocacy groups” — which use hyperbole and myth to distract from the truth, to perpetuate a cycle of their own – hefty salary payments paid to them by unwitting contributors.

Lawmakers must take a thoughtful view of this essential credit product and pay attention to facts. They’ll see the best course of action is to regulate the bad actors and provide financial education, not restrict the free market.

[My thanks to the San Antonio Express News, who kindly accepted this op-ed and indicated they would try to publish it last week but apparently was unable.]

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