Report Shows Payday Lending Damages Economy

torn one hundred dollar bill
A new report has stated that payday loans damage the nation’s economy. Worse still, they purportedly cost the economy nearly $1 billion in 2011.

The report, titled The Net Economic Impact of Payday Lending in the U.S., argues that by borrowing instant loans, consumers are simply getting themselves into worse-off situations.

By using data from state regulators, the report claimed that the payday loan industry caused a loss of economic activity and a net loss of 14,094 jobs.

It also found that industry sectors, such as health care, education and retail trade, lost $774 million in household spending that had to be diverted to making payments on instant loans. Even more worrisome is that the report unveiled that payday loan borrowers were five times more likely to file for bankruptcy than the general population.

Tim Lohrentz, Director of Inclusive Business Initiative at Insight Center for Community Economic Development and lead researcher for the report, told that there is simply no benefit to borrowing an instant loan.

However, Lohrentz did agree that a regulated industry is always welcomed over an unregulated alternative.

“Regulated if it is a legal practice,” said Lohrentz. “If it is not a legal practice it should be prohibited through sanction, including online. Online payday should be regulated at a federal level.”

He also pointed out that borrowers tend to become repeat borrowers due to the nature of payday loans. This causes borrowers to pay more in interest than the total value of the original payday loan.

Lohrentz’s report found that borrowers did not lose money by simply borrowing payday loans, but instead they lost money through compounding interest and rollovers.

“Households didn’t lose money on the loan, they lost money on the interest payment,” said Lohrentz. “If it were a loan with an 18 percent interest rate (for example) there would have been no money lost to households.”

He also pointed out that California, Texas, Florida, Mississippi, and Illinois were the states hardest hit in terms of economic loss from instant loan borrowing.

Lohrentz did advise that the payday loan industry should reform itself in order to avoid the repeat borrower phenomena and to curtail high interest rates. However, he understood that the industry would have to reduce fixed costs; namely the cost of operating retail lending stores.

“This might mean combining a presence with other services or industries,” he said. “In the future I could see a reformed product partnering with grocery stores, gas stations, and maybe even banks and credit unions to deliver its product.”