The costs of payday lending extend far beyond the impoverished and desperate people who turn to predatory short-term loans to help pay bills. The business practice also harms overall job growth and shrinks state economies by hundreds of millions of dollars, according to a new economic analysis from the Howard University Center on Race and Wealth.
The research breaks new ground by analyzing not just payday lenders’ ability to extract profits from the poor, but also the follow-on impacts on the overall economy. The researchers looked at lending’s impact in Alabama, Florida, Louisiana, and Mississippi, using the same database that industry-friendly analysts have used to suggest that payday lending is a net positive for the many states that allow it.
“On the one hand, they hire people. On the other hand they depress consumer spending. On the net, what is the impact?” co-author Dr. Haydar Kurban said. “What we fot is that the impact is negative for most of the states.” The economists’ model found that payday lending shrinks Florida’s economy by more than $300 million each year, and costs the state 2,150 jobs on net.
That means that all of Florida, including state revenues, suffers from the payday lenders’ activity in their state. “Up to now people always looked at the neighborhoods” affected by payday lending, Kurban said, noting that his colleagues didn’t even attempt to calculate whether payday lending places additional strain on taxpayer-backed social safety net programs. “The question here is, why are states supporting that?”
The Howard study’s results in the other three Gulf states are harder to process. The Alabama and Louisiana models showed similar, smaller drags on total economic output, but not a net drop in employment. Mississippi’s model found that payday lending actually boosts the state’s economy on net.
Florida is the only state of the four where regulators keep track of an exact total for fees and interest spending by payday lending customers. It’s also the state that most closely resembles the national economy, which Kurban explained means their results will be most precise for the Florida economy. The national data the researchers used to calculate how much consumer spending payday loan fees and repayments take out of the economy are more useful in looking at Florida than at the other states.
Previous research has estimated that payday lenders nationwide pull about $3 billion in profits out of the country’s poorest communities each year. But the Howard research pushes deeper into what that means for everyone else who participates in the broader economies surrounding those pockets of poverty. That line of research would not have been possible for academics just a few years ago, before the Consumer Financial Protection Bureau (CFPB) was created. The CFPB began scrutinizing payday lenders more than a year ago, and has published essential data that pulls back the curtain on how these companies operate. Their work shows that the vast majority of payday lenders’ revenues come from customers who end up trapped in debt cycles. While a significant subset of borrowers are able to emerge from a payday loan after just a couple of renewals, the industry makes its money on customers who take out long sequences of 10 or more loans.
There are a few different alternative models of providing short-term credit to the working poor when they are unable to cover their bills. One, championed by Sen. Elizabeth Warren (D-MA) and other progressives, would empower the U.S. Postal Service to provide basic banking services including short-term loans. Another, favored by more centrist reformers, is to replicate the strict regulations that Colorado imposed on payday lending in 2010. Rather than drive the lenders out of business by imposing a strict interest rate cap, the state set maximum loan amounts and imposed a mandatory cooling-off period before someone could re-borrow on payday lending terms. For proof of the model’s efficacy, researchers from the Pew Charitable Trusts point to Colorado’s annual interest rates of 129 percent for payday loans, far below the 339 percent national average. That is still extremely expensive credit, but it allows desperate people to plug temporary financial holes without mortgaging their economic future.