A recent study conducted by researchers at Georgetown University on the payday advance industry shows, that despite beliefs to the contrary, not all of the industry’s customers are low-income or impoverished.
But, it also suggests, the real problem may not be a payday loan customer’s income or access to credit, but Americans’ inability or unwillingness to properly manage their money.
The payday loan or payday advance business allows customers with checking accounts and incomes to write a check for a set amount and receive cash, while the business holds the check.
The consumer pays a fee for the service and can either cover the check with the bank when it is deposited or pay the money and pick up the check, usually two weeks later.
Because the fees would sometimes add up to an annual interest rate of more than 300 percent, the industry has been attacked by consumer advocates and likened to loan sharks who prey on low-income customers.
But the study, conducted by the Credit Research Center at Georgetown’s McDonough School of Business, reported that more than half of the payday advance customers reported annual incomes of between $25,000 and $50,000 and that three out of four have a high school diploma or some college.
The high representation among the middle class was unexpected, said Dr. Gregory Elliehausen, Georgetown senior research scholar and co-author of the study.
“There are some low-income customers, but they’re disproportionately middle income,” Elliehausen said.
He’d expected to find that the majority of customers were without credit cards and that the payday loans were more of a “fringe bank source.”
“I was a bit surprised that it in fact wasn’t,” Elliehausen said.
Some customers even had money in savings accounts but preferred to borrow rather than tap into that money.
They were also young, one-or two-parent families who had yet to reach their peak earning years and had a high debt-to-income ratio.
The Community Financial Services Association of America, the payday advance industry’s national trade group, funded the study.
However, Elliehausen said, they provided only the money and access to customer information.
So, where’s the problem?
“The problem is folks with absolutely no cushion living from paycheck to paycheck with no savings,” said Dr. Rose Rubin, professor of economics at the University of Memphis.
There are a lot of low-income people who work hard and are still unable to get a few weeks ahead, Rubin said.
But there are also people out there who don’t save, don’t budget and who commit too much of their income to debt.
As a result, when the utility bill is higher than usual, a tire blows out or a car battery dies, there is no money available and borrowing is the only solution.
Working people should exercise the practice of “pay yourself first” even if it is a small amount each week, Rubin said.
“Usually that means the dreaded budget process,” she said.
It also may mean saving money by packing a lunch a few days a week or cutting out some luxuries.
“The whole objective is to get off the merry-go-round and stay off,” she said.
Basically, there is a market for the payday loan industry.
But if more people did a better job of managing what they earn, that market wouldn’t be so great.