The Insight Center for Community Economic Development published a report late last year that analyzed the payday loan industry. It concluded services that offer short-term, high-interest loans cost the United States economy approximately $1 billion and thousands of jobs in 2011. The report might add fuel to the fire for many local and state governments trying to clamp down on payday loan enterprises.
According to the study, the agreement to repay the loans led to $774 million in lost consumer spending, 14,000 job losses and 56,230 Chapter 13 bankruptcies that took about $169 million, or about $3,000 per person, out of the overall economy.
The report also discovered that the five states with the highest totals of interest charges were California, Texas, Florida, Mississippi and Illinois. Economic losses in these states varied from $55 million (Illinois) to as high as $135 million (California).
“We wanted to give a true picture of the economic impact of payday lending – examining all potential economic benefits and costs and see how they balanced out. Our findings clearly show that payday lending is a drain on the U.S. economy,” said Tim Lohrentz, the organization’s program manager and author of the report, in a statement.
He added that one of the additional purposes of the study is to better inform policymakers when they address the issues currently facing the payday lending industry.
Borrowers use payday loans for a variety of things, including emergencies, rent, household repairs, groceries and food, educational expenses and others. Although borrowers might feel it’s beneficial to have the option of using a payday loan service, public officials argue that these businesses prey on the impoverished with high interest rates and exorbitant fees.
“Payday loans are an ongoing problem and an economic drain,” said added Lohrentz in an interview with CNBC. “The amount is not huge in the big picture of the total economy, but it’s big enough.” The report noted that repeat loans are continually made because of the high interest charges and short-term lump-sum payments.
The industry has been somewhat fighting back against some of the common complaints made in the media. Advance America Senior Vice President Jamie Fuller cited statistics that found 95 percent of its clients pay back the loans in the allotted time period and that the interest rates are different because it’s for a 14- or 30-day loan as opposed to a four-year loan.
“While it is easy to criticize our industry based on part of the facts, our customers understand the cost of our product,” Fuller said to the Selma Times Journal. “Most commonly the customer comes in one time and we never see them again. It’s not like they are trapped in some sort of cycle of debt.”
In Great Britain, payday lenders will only be allowed two options take money from client accounts and limit the number of loan roll-overs. This begins in April of this year.
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