Federal Reserve Paper Finds No Harm in Payday Loans

While many critics and politicians have been busy slamming payday loans, and the Consumer Financial Protection Agency has been busy with their public forums and discussions. It seems someone at the Federal Reserve has been busy doing research.  In contrast with most of the narrative that is being discussed about the payday lending industry. The Federal Reserve working paper on payday loans and economic conditions concluded that the controversial short-term loans have little to no impact on a borrower’s financial well-being.

In fact, the paper’s author, Neil Bhutta, concluded that having access to cash advance loans only lowers borrower credit scores by a meager 2.86 points. While many critics focus on the exorbitant interest rates associated with these loans, few focus on the negative impact of the alternatives; like being unable to pay medical bills, electric bills, or pay for unexpected car repairs – all of which can have much more disastrous effects on a family’s financial status.

However, Bhutta’s work contradicts much of the conclusive data collected on the effects of short term loans on families’ financial health. This is because Bhutta’s study focuses on different variables and data points, essentially resulting in comparing apples to oranges. While Bhutta’s study uses credit scores to define financial health, most studies on the industry focus on data collected from actual payday loan customers.

Nick Bourke, director of research for small-dollar loans at the Pew Charitable Trusts believes that using credit score data may be misleading because customers of quick cash loans are typically near the bottom of the spectrum anyway, leaving them with little further to fall in the eyes of credit bureaus. In contrast to Bhutta’s findings, Pew’s own research shows that they typical customer of a payday advance has multiple credit lines and loans to pay off. In contrast to the general opinion that these people are “underbanked”; and would simply cut back on expenses, borrow from family, or sell possessions in order to pay off bills if payday loans were not available.

This sharp contrast in findings and explanations shows why it’s so difficult to pry the truth out of studies and information on any subject, and why it is so important to refrain from rushing to judgment on critical issues.

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