Half of all Americans would have a difficult time finding just $2,000 to cover an unexpected expense. This comes from a new study released by the National Bureau of Economic Research, and highlights the thin thread by which many people and families hang. Payday loans are targeted at individuals at financial precipices and advertised as a quick way to cover expenses in a tough month without worrying about writing bad checks. Though payday loan fees are very high—some say usurious—they do tend to be lower than the fees banks charge for bad checks and overdraft protection.
But the reality is that payday loans may exacerbate rather than ease the pain of financial shortfalls. Brian Melzer, an assistant professor of finance, found in his own research that payday do little to ease difficult situations. “In fact, I find the opposite effect. Households are more likely to report distress when they have better access to payday loans,” he said in an interview with Kellogg Insight.
Melzer’s research compared different regions where payday loan regulations changed over time. In places where payday loans were readily accessible, people in low- to middle-income households were 7 percent more likely to skip meals, 25 percent more likely to have difficulty paying bills, and 40 percent more likely to drop phone service. On top of that, they were also 60 percent more likely to move out of their home and 25 percent more likely to delay medical care.
Payday loans are often used by a stratum of society that has been hit hard by the recession—those earning between $15,000 and $50,000. Such households are not poor enough to qualify for traditional assistance programs, but do not make enough money to ensure they are safe from the occasional bump in the road. And once the cycle of payday loans is started, it’s hard to stop. Melzer found that nearly 60 percent of borrowers took out more than four payday loans per year.
The Real Costs of Credit Access: Evidence from the payday lending market – Kellogg Insight
Financially Fragile Households: Evidence and Implications – NBER Working Paper #17072
50% of Americans Couldn’t Come Up with $2,000 – The Atlantic Wire
Photo by adotmanda.