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April 30, 2008

Payday Loans Cost Borrowers Less, Study Finds

This week, researchers at East Carolina University’s Department of Economics published an analysis on the most common interest rates of payday loans compared to charges by bank overdraft services. The study was able to directly compare the two by viewing overdraft protection as a form of a short-term loan. Since it has recently become politically popular to rant against payday loans, the study’s findings hold particular significance. The result: the rates of payday loans were twenty times lower than the alternative. In their findings, the researchers note:

Payday lending attracts attention for its high interest rates, but bounce protection loans are much more expensive. When the amount borrowed is low and the time outstanding is short, the effective interest rate paid on this loan can be quite high.

Banks charge customers who occasionally bounce checks (one to 10 times per year) interest rates exceeding 6,000 percent. Those who overdraft their accounts more frequently can pay more than $3,000 in fees annually. In an extreme example, a bank forced one individual to pay an interest rate of over 260,000 percent for a mere $3 overdraft left outstanding for a single day. (The full study is available here: “Hidden Consumer Loans: An Analysis of Implicit Interest Rates on Bounced Checks”)

This latest study is only one of many that demonstrates a real need for short-term loans, especially when other available options come at a much higher price. The fact is Americans suffer when politicians arbitrarily limit our financial options. So it’s difficult to understand why meddling bureaucrats in several states across the nation are still jumping on the self-righteous bandwagon against the payday lending industry. Borrowers are best served when they have more choices to pick from, not when politicians eliminate what is for many their only option.