I remember when I had my first car.Â I was so overprotective that I only took it the dealer for maintenance, even though it was expensive.Â One day, during a routine service, the repair dude told me the engine mounts were worn and it was probably a good idea for them to be replaced.Â Now Iâ€™m no car expert but I know about engine mounts.Â It sounded fishy, given that Iâ€™d only driven 60,000 miles, but I agreed. It cost $1,450.
The next time I needed routine maintenance, I decided to go to a local mechanic a friend has recommended.Â This guy was awesome.Â He did the service, and even checked a strange sound Iâ€™d been hearing in the rear at no charge.Â I asked him about the engine mounts.Â He said, â€œI noticed you had new ones on there.Â How much did you pay?â€Â I told him and he shook his head.Â â€œNext time, come to me.Â Iâ€™d do it for 40% lessâ€.
I never went back to the dealer and this mechanic remains honest as the day is long.
Whatâ€™s this got to do with payday loans?
One of the primary criticisms is that people get caught in a cycle of debt.Â Now I imagine that in the early days of payday lending, that probably happened a fair amount.Â But eventually, Iâ€™ll bet that lenders realized that having people rollover a loan multiple times was bad business, and bad for business.Â Iâ€™ve read over the annual reports of a few payday loan companies and a few state reports on payday loans.Â I donâ€™t think the cycle of debt issue is at all what it is made out to be.Â I think itâ€™s probably limited to a few naughty lenders and a few people who donâ€™t know any better, just like I didnâ€™t know any better with my auto dealer.
But letâ€™s say, for argumentâ€™s sake, that there was some kind of cycle of debt issue out there.Â Let\s say some dude gets a payday loan and rolls it over and over, like, eight or nine times.Â So this $400 loan ends up costing him over $500 in fees, and heâ€™s in the thing for 4 or 5 months, and still has to pay back the principal.
Do you think this guy is ever going to take out a payday loan ever again?Â No way. That customer is gone, baby, gone.
Now, extrapolate this out to millions and millions of borrowers over many many years.Â At some point, very early in this process, millions of borrowers would have used a payday loan, gotten into this cycle of debt, and then abandoned payday loans altogether.
Now some simple math.Â There was a Pew survey out last year that said 12 million people use payday loans.Â Thatâ€™s about 4% of the American population.Â So if only 4% of people even use payday loans, and if all these millions of borrowers over the past twenty years or so were caught in a cycle of debt and then abandoned these loans, youâ€™d think that there would be nobody left to use these loans.
Yet there are.Â 12 million of them!
I think that discredits Ye Olde Cycle of Debt Theory, donâ€™t you?