According to the Consumer Financial Protection Bureau and consumer advocacy groups, payday lenders pose a threat to low income borrowers. But aside from the paternalism (and whiff of classism) inherent in the CFPB's recent regulatory proposal, the arguments against payday lending just don't stack up. If anything, they show that payday lenders provide a needed service that protects many people from hardship.
Starting at the top, one of the most prevalent arguments against payday lending is that it traps low income people in a cycle of debt. After taking out one loan, borrowers are unable to pay it back when it's due two weeks later and so "roll it over," taking out a new loan and paying a new fee to pay off the first loan, rinse repeat for a period of months.
A study by the Pew Charitable Trusts found that the average payday loan borrower is in debt to a payday lender five months out of the year. Instead of showing that payday loans are traps, however, the fact that borrowers are in debt five months out of the year (and out of debt seven) shows that (1) people do pay off the loans; and (2) they go back. In other industries, the presence of a lot of repeat customers is an indication that the business is doing something right: people keep coming back for more. In fact, payday lending is no different.
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