Cost of Payday Loans Not Excessive
Studies Show Cost of Payday Loans Not Excessive
Studies have shown that payday loan clients are mostly low to middle income families (LMI) that do not have access to normal banking and are in need of short term quick cash. Critics of the payday loan industry keep arguing that these lenders have excessive fees that swallow up the customers’ income.
A study called “And Banking for All ?” by Michael Barr and Benjamin Keys of the University of Michigan and Jane Dokko of the Federal Reserve Board says that “for the vast majority of households, annual outlays on financial services for transactional and credit products are relatively 
small, around one percent of annual income.”
The study was done on an average of 1000 Detroit LMI families and shows detailed statistics which prove that most of the mainstream financial fees such as bank account fees, check fees , overdraft charges or credit card fees are way more significant than alternative financial service expenses such as payday loans. The study also says that “The alternative financial services sector plays a significant role in the provision of financial services to LMI households”. Federal Reserve studies also show that 25 percent of the LMI households are unbanked, which makes the need for payday loans and check cashing services.
The payday loans have a negative impact on just a few LMI families but, at a national level, customers of payday lenders pay from 400 to 600 dollars yearly, which are just 2 or 3 percent of their annual income. Just in Detroit, the sums were a lot smaller, between 41 and 98 dollars.
In Detroit, LMI households mainly used payday loans to avoid food shortages and evictions rather than luxurious expenses, as the media would have the people believe. Also, payday loans are their only option since most of the LMI families are not qualified for most of the traditional banking offers because of their low income.
There are financial institutions that are trying to compete with payday lenders by offering similar products, yet there is little motivation to use these services because these institutions draw their operating money from expensive services such as overdraft protection which makes the risk of potential loss even greater.
When it comes to savings, it seems that people know very little about it. That’s why most of the payday loan lenders and banks are trying to give information as detailed as possible.
Many LMI households prefer to use payday loan services and remain unbanked because of the high fees and conditions imposed by traditional banks, which are almost impossible for them. Payday loans are very popular because they work with a segment of the population that traditional banks can barely help or cannot help at all. And as the studies show, compared to the annual income, it is clear that the payday loan fees are not even remotely excessive.
