RONALD MANN: I have a general idea that people that are really tight for money know a lot more where their next dollar is coming from and going than the people that are not particularly tight for money. So, I generally think that the kinds of people that borrow from payday lenders have a much better idea of how their finances are going to go for the next two or three months because it’s really a crucial item for them that they worry about every day. So that’s what I set out to test.
First, Mann wanted to gauge borrowers’ expectations – how long they thought it would take them to pay back a payday loan. So he designed a survey that was given out to borrowers in a few dozen payday loan shops across five states.
MANN: And so, if you walked up to the counter and asked for a loan, they would hand you this sheet of paper and say, “If you’ll fill out this survey for us, we’ll give you $15 to $25,” I forget which one it was. And then I get the surveys sent to me and I can look at them.
Later on, the payday lenders gave Mann the data that showed how long it actually took those exact customers to pay off their loans
MANN: And that surprised me. I didn’t really expect that the data would be so favorable to the perspective of the borrowers.
MANN: If your prior is that none of the people using this product would do it if they actually understood what was going on – well, that just doesn’t seem to be right because the data at least suggests that most people do have a fairly good understanding of what’s going to happen to them.
On the other hand, this leaves about 40 percent of borrowers who weren’t good at predicting when they’d pay the loan off. And Mann found a correlation between bad predictions and past payday loan use.
MANN: The data actually suggest that there’s a relatively small group of borrowers, in the range of 10 to 15 percent, who had been extremely heavy users, whose predictions are really bad. And I think that group of people seems to fundamentally not understand their financial situation.
So, given this fact, how should one think about the industry? Is it treacherous enough that it should be eliminated? Or, is it a useful, if relatively expensive, financial product that the majority of customers benefit from?
Jonathan Zinman is a professor of economics at Dartmouth College. Zinman says that a number of studies have tried to answer the benchmark question of whether payday lending is essentially a benefit to society. Some studies say yes …
Which suggests there is a small but substantial group of people who are so financially desperate and/or financially illiterate that they can probably get into big trouble with a financial instrument like a payday loan
ZINMAN: But we have other studies that find that having more access to payday loans leads to a greater incidence of detrimental outcomes.
Consider a study that Zinman published a few years back. It looked at what happened in Oregon after that state capped interest rates on short-term loans from the usual 400 percent to 150 percent, which meant a payday lender could no longer charge the industry average of roughly $15 per $100 https://rksloans.com/payday-loans-ca/ borrowed; now they could charge only about $6. As an economist might predict, if the financial incentive to sell a product is severely curtailed, people will stop selling the product.