It is no secret that there are lots of folks and organizations out there that like to drag the payday lending industry through the mud whenever they get the chance. Things have become so bad for some alternative financial providers that some lenders have been forced to close up shop because of some heavy pressure from government initiatives, like Operation Choke Point. It appears, however, that there is some very real proof that there are indeed benefits to payday loans that some people don’t want other folks to know about.
Two new studies on the payday lending industry cast a new, more positive light on the industry as a whole. A Law Professor from Columbia, Ronald Mann, came to some very interesting conclusions in his most recent study. Here’s just a little bit of what Professor Mann’s study revealed about the short term lending industry:
The study proved that credit ratings changes for people who default on payday loans are not all that much different from the credit score changes that responsible borrowers have. The decline in credit score in the year that a borrower defaults greatly exaggerates the final effect of the actual loan default. This is because the credit scores for folks who default on their loans typically experience very large increases for more than 24 months after the year that they defaulted on their loans.
In other words, the payday loan default is not to blame as the ultimate cause for certain borrowers’ financial problems. This is usually because the borrowers who do not pay their payday loans back usually have dealt with other financial problems in the past that caused their credit scores to decrease. This all goes on to suggest that defaulting on a payday loan plays a very small part in the complete timeline of distress that default borrowers experience. It is hard to bring all of this into line with the improvements that the improvements to borrowers’ financial situations come from the ‘ability to repay’ requirements that are factored into every payday loan that is provided by short term lending companies.
In a related study, a Professor from Kennesaw State University, one Jennifer Lewis Priestly, also revealed some positive news about the payday lending industry. Her report was titled Payday Loan Rollovers and Consumer Welfare. This report came to the conclusion that the borrowers with the most rollovers actually winded up with more positive credit changes than those with fewer rollovers. This seems to provide proof that borrowers who have to deal with fewer lending restrictions have more positive financial outcomes, as defined by higher credit scores over the course of time.
In the report Priestly said, “…not only did sustained usage not contribute to a negative outcome, it contributed to a positive outcome for borrowers.” She even noted that the findings in her report are in line with what other studies have already stated. Priestly also discovered that the vast majority of people who take out payday loans wind up with an increase in their credit score during the time that their finances were actually studied. The ultimate conclusion of her study seems to indicate, “despite several years of finger-pointing by interest groups, it is fairly clear that, whatever the “culprit” is in producing adverse outcomes for payday borrowers, it is almost certainly something other than rollovers—and apparently some as yet unstudied alternative factor.”
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