New University of Michigan survey finds payday borrowers

Arizona and Ohio voters face deceptive industry ballot initiatives Tuesday


Center for Responsible Lending
November 3, 2008

Washington, DC - A survey of Detroit households suggests payday loans are no solution for those in financial need. The survey by University of Michigan law professor Michael S. Barr found that respondents using payday loans were more likely to file for bankruptcy, be evicted, or face utility shut-offs than respondents who had not taken a payday loan.

Payday lenders have long argued that their loans are helpful to people who can’t quite make it to their next paycheck, but research from the Center for Responsible Lending, based on data from state regulators and the payday lending industry itself, finds that payday borrowers typically end up having to renew their loans many times per year, paying more interest for a principal that doesn’t go down.

While the Michigan survey does not establish a causal relationship, it finds that 11 percent of payday borrowers experienced bankruptcies in the preceding year, while only 4 percent of non-borrowers did so. Twelve percent of borrowers faced eviction; that rate was 6 percent for non-borrowers. Over a quarter (26%) of payday borrowers had their utilities shut off for non-payment in the preceding year, while only 9 percent of non-payday borrowers experienced this hardship.

Dr. Barr presented the survey results to the Federal Trade Commission last Thursday, in a presentation concluding that alternative financial services like payday lending and other high-cost loans are “not well-designed to serve low- and moderate-income households.” Barr said excluding lower-income households from lower-cost systems leads to economic inefficiency, is costly for low-income households, and “promotes dis-saving.” The survey was a random, stratified sample of 1003 Detroit households.

The issue is urgent for voters in Arizona and Ohio, where payday lenders have paid for “citizens” ballots that pretend to make reforms to their practice. The payday lending industry is counting on voter confusion to win votes in the respective races. Trade group representatives have said the two state ballots will influence the future of payday lending nationally.

In Ohio, voters must vote “Yes” on Issue 5 to end 391 percent interest rates in that state. In Arizona, because of the wording of the ballot measure, voters must vote “No” on Proposition 200, or payday lenders will have a voter-protected law legalizing their 391 percent interest rates for good. In both states, the industry is spending millions of dollars trying to persuade citizens that voting their way will reform the industry.

For more information: Chris Kukla at (919) 313-8520 or chris.kukla@responsiblelending.org or Carol Hammerstein at (919) 313-8518 or carol.hammerstein@responsiblelending.org

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.