The general observation is that cash advance payday loans are not a good option for any consumer. But a new study has concluded that for many, access to short-term personal loans is critical to their sustenance without facing greater financial hardship.
The November 2007 study by Donald P. Morgan, Research Officer with the Federal Reserve Bank of New York, and Cornell University graduate student Michael R. Strain, “Payday Holiday: How Households Fare after Payday Credit Bans,” challenges the general norm about payday cash advance loans.
Payday loans are temporary short-term unsecured personal loans that are meant to be paid back by consumer’s next payday. A personal loan is a short-term solution to a short-term emergency. The borrower seeks the loans to pay for unexpected expenses such as, medical emergencies, overdue bills, overdraft protection fees, late bill payment penalties, or other short-term obligations.
The costs of overdraft fees, overdue bills, and late fees as the researchers of the study discovered caused people to have increased bounced checks and higher Chapter 7 filings in states that prohibited access to payday loans such as, Georgia and North Carolina.
The study showed that certain households in states where payday lending was outlawed were more vocal about credit lenders and debt collectors than states without payday restrictions. The research supports the view of the payday lending industry. The vocal Community Financial Services Association of America (CFSA), a national organization dedicated to promoting the interests of payday lenders has for years stated that in many cases payday loans are an alternative to overdraft fees and credit card advances. According to the CFSA, the research simply validates their stance the personal loans help their customers avoid financial hardships.
However, some states like North Carolina, Georgia, Virginia, and others have restrictions in place or are contemplating restrictions against payday advances. Many payday customers have joined the CFSA in promoting payday loans as a safer alternative to late fees. The non-payment of late fees or credit card debt and too many bounced checks can negatively affect your credit.
The payday industry feels vindicated by the latest study, in that their customers who no longer have access to the personal loans are forced to turn to less attractive alternatives. The payday lenders feel that their industry has been unfairly targeted by the media and certain consumer groups.
Whether the study leads to a 180 degree change in the perception about payday loans overtime is anyone’s guess. But what is important is that different viewpoints substantiated by hard facts are allowed to be presented to the public, so that they can make the best educated decisions regarding their personal fiancés.