PAYDAY LENDING: DO OUTRAGEOUS PRICES NECESSARILY MEAN OUTRAGEOUS PROFITS?
Fordham Journal of Corporate & Financial Law,
2007 by Huckstep, Aaron
Continued from page 7.
In comparing the Georgetown and Colorado studies, it appears that the design of the Georgetown study limits its usefulness. By grouping the income bracket between $25,000 and $49,999, the Georgetown study missed an opportunity to provide valuable information regarding subcategories within this income bracket. For instance, the Colorado study indicates that the average income of borrowers is $28,000.141 Other studies mentioned above provide consistent results, with average incomes near $25,000.142 The Georgetown study might well indicate similar results, but it does not provide readers with an average income but rather an income bracket.143
The Georgetown study is clearly contradicted by the Colorado study with respect to the use of payday loans by individuals in the income bracket above $50,000. The Georgetown study claims that 25% of respondents had incomes above $50,000, while the Colorado study indicates that only 0.24% of respondents are within this income bracket.144 Common sense could support the Colorado results because it appears that the conventional wisdom is correct in this regard: payday lenders are clearly serving lower-income individuals with much more frequency than higher-income individuals.
While the Colorado study does not indicate how borrowers used payday loan funds, both the Georgetown and Colorado studies suggest that a high percentage of borrowers use payday loans for non-emergency reasons. Although the Georgetown study claims that a majority of borrowers use funds for emergency reasons, the high percentage of borrowers having at least 7 loans per year (almost 50%) indicates that either the borrowers had a drastic financial emergency, a high incidence of emergencies, or are using the payday loan as a longer-term cash flow crutch.145 This is bolstered by the high percentage of borrowers who incur more than 14 loans per year (22%).146
Although the Georgetown study does not calculate an average number of loans per borrower per year, calculations from the study's data indicate that the average number of loans would be near 10. Similarly, the Colorado study shows that the average borrower takes out 9 payday loans per year, and that about 20% take out at least 16 loans per year.147 Again, this information suggests that borrowers, on average, are not using payday loans exclusively (or even remotely) for emergency reasons. The industry's suggestion that the product is designed to be used for emergencies may be correct in theory, but it ignores the reality: payday borrowers are using the product with a frequency that suggests their only "emergency" is that their bank account is low. This is not intended to suggest that a lack of funds is a trivial thing; the industry's justifications, however, clearly paint a different picture of "emergency." Nevertheless, it does appear that lower-income people have a need for a relatively short-term unsecured financial vehicle. Some states have completely outlawed payday lending; yet this only leaves the intended borrower with an unfulfilled need and an incentive to find alternatives that are scarce and possibly illegal.148
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