Payday Loans Cost the US Economy $1 Billion in 2011

[bjl584]

http://www.cnbc.com/id/100701516

[Baby_nurse]

I just don't understand how this form of loansharking can still be legal.

[phantom]

Not that I want to defend payday lenders, but this study feel intentionally misleading. Unfortunately, I'm afraid I don't really understand the point that it's trying to make, so I can't argue against it.

In 2011, payday lenders received interest payments totaling $3.3 billion. But each dollar of that interest subtracted $1.94 from the economy through reduced household spending while only adding $1.70 in spending by payday lending establishments. The net impact is that for each dollar of payday lending interest paid, an estimated 24 cents is lost to the U.S. economy.

How does paying $1 in interest give a family $1.94 less to spend? I wouldn't think it would give the family exactly one dollar less to spend. Similarly, how does taking one dollar in interest give a payday lender the ability to spend $1.70? I wouldn't think it could give the lender more than $1 to spend. I'll admit I don't know that much about economics, but there's a lot of hand waving going on that I'd be curious to see explained. I'd also be curious to see how this cost to the economy (however it's calculated) compares to the cost of other forms of lending.

[disneysteve]

How does paying $1 in interest give a family $1.94 less to spend?

I'm not sure but this might have to do with consumer confidence type of calculations. For example, when the stock market drops, people spend less even though their income is exactly the same. They feel poorer when they look at their 401k statement even though they are earning just as much as before. The opposite happens when the market goes up. People feel richer and spend more freely again even though their actual income hasn't changed.

So maybe folks who are stressed over payday loans tighten their belts more to focus on paying the loans and hold onto their available money more firmly.

[dczech09]

I just don't understand how people can get into such deep messes with these things. At what point do you realize that you are falling a little bit further behind every time you rollover, or even worse, take out a new loan just to pay off a previous one? What about taking out a loan just to fund the interest and fees on all the other loans?

I personally do not feel that it is right to put the blame entirely on the lenders. They are just fulfilling a need. I am not at all supporting or justifying what they are doing. But if people were not in such precarious situations where these loans were attractive, then there would not be a market, and thus would not be businesses like these.