Two studies confirm value of small dollar loans
August 20, 2009
Congress is currently considering a number of bills that would restrict, if not eliminate access to small dollar credit, the types of loans that millions of low- to moderate-income consumers need to help them with unexpected cash shortfalls. However, two studies recently issued by IHS Global Insight and the Mercatus Center at George Mason University address the importance of payday loans to communities and customers. They also address the devastation further restrictions will create for customers and the industry. Payday loans provide a critical service to many low-income individuals and families, allowing customers to preserve their credit and not rely on other credit methods they find unsuitable to their circumstances.
The study conducted by IHS Global Insight, "Economic Impact of the Payday Industry," focuses on the need consumers have for payday loans and the services the industry provides. The industry is consumer driven and exists because customers want and need the service. Customers who can’t access other sources of credit use their payday loans to pay bills and for emergency situations, such as unexpected medical costs or car repairs. Customers avoid alternatives that would be detrimental to their credit, like bounced checks or late fees, which would be more costly to the customer than a payday loan.
This study also illustrates the industry's impact on national employment and the national GDP. According to the study, the industry generates 155,000 jobs, including those in payday loan store locations, national headquarters, and other industry-related services. In 2007, payday loan stores provide their critical services in 39 states and contributed more than $10 billion to the national GDP.
The second study, "The case against further restrictions on payday lending," was conducted by the Mercatus Center at George Mason University. It discusses the damaging effects customers experience due to restrictions on the payday loan industry. The study concluded that restrictions by Congress "would make consumers worse off, stifle competition, and do little to protect consumers from concerns of over indebtedness and high-cost lending."
Agreeing with IHS Global Insight’s findings, the Mercatus Center stated that payday loans are more attractive than other alternatives. Having little access to other sources of credit, payday loans provide the credit these customers need. Instead of pawn shops, bounced checks, and credit card cash advances, customers rely on local payday loan stores. Though payday loans are not inexpensive, they do not run close to the cost of these alternatives.
Because payday loans are thought to be too expensive does not mean that Congress should foreclose a viable option for credit. Congress would be eliminating access to small loans that so many individuals find necessary to maintain their quality of life. Stripping these customers of their access to payday loans would create significant personal difficulty and may result in disconnected utilities, lack of funds for emergencies, and potential damage to credit. Instead of protecting consumers, Congress would only harm their constituents. Congress needs to reconsider any legislation that would restrict this industry that has provided a critical service to their customers.
