The Baltimore Sun published an article today that claims payday loans are pushing people into bankruptcy. To substantiate this wildly absurd claim, they site research from Vanderbilt University and the University of Pennsylvania. But they missed just a few things.
First of all, their study found a correlation between payday loans and bankruptcy, not causation. That should mean something if you know anything about statistics. For example, 100% of cancer patients drink water, so with a perfect correlation between water drinking and cancer, can one conclude that water causes cancer? Hopefully you get the point.
Another problem is that this study deals specifically with Chapter 13 bankruptcy filings. These make up about one-fourth of all filings, and in the minimal 4 year period studied, these were primarily filed by wealthier debtors trying to preserve equity in a residence. Only about 2% of payday loan borrowers ever file for bankruptcy, and most do not file a Chapter 13.
Perhaps the most entertaining part of the article was this: “When the couple filed for bankruptcy, they had a mortgage,credit card debt and medical bills to pay. They also had nearly $2,000 in payday loan debt, plus hundreds more in fees and interest.” So let me get this straight. This couple had a mortgage that was likely six figures, credit card debt that was likely five figures, and this $2,000 something debt from payday loans. And payday loans contributed to the bankruptcy?
Obviously the problem with borrowing payday loans does not rest on the loans but on the people borrowing them. Clearly this couple lacked any kind of financial management skills. So the real point is this: people who borrow payday loans and don’t pay them back end up in financial trouble.
Get out of town! It hurts your finances to not pay back a loan? Perhaps their study should have included everyone who borrowed a payday loan, not just those who defaulted on their payments. Then I’m sure we would see a different story.
This is what was done at Clemson University. Their study encompassed over 10 years of time, borrowers from every state, and much more information. Compare that to the Vanderbilt study that focused on only Texas for just 4 years.
The median income of those in the Clemson study? $43,000 a year. The median income of those in the Vanderbilt University? $20,000 a year. Are you catching on yet? Critics of payday loans and supposed consumer advocates are doing nothing more than twisting the facts to “prove” their position.
The national default rate on first time borrowers of payday loans is around 40%. So it would seem there are far more responsible borrowers of payday loans than irresponsible ones. Let’s not fall for the empty rhetoric and contorted data that tells us we should ban payday loans.
