Kansas City Federal Reserve Study Finds Merit in Payday Loans

By: Javi Calderon
Kansas City Federal Reserve Study Finds Merit in Payday Loans

Though the payday loan industry has been expelled from 10 states in the U.S. and has been regulated to a 36% APR cap limit in 17 others, it continues to see growth in popularity across the country.

For several years the payday loan industry has been lambasted by the media and by government officials, however, they have stuck around, and have finally found some much-needed support.

Payday lenders pitch themselves as an option for people with poor credit to get quick cash to settle unexpected expenses. Legislators and the media have painted the industry as an organization of sleazy loan sharks, preying on the poor, trapping every unsuspecting customer in a cycle of high-interest loans.

A contentious report published by the Federal Reserve Bank of Kansas City supports the industries’ claims that their products, in fact, do benefit low-income populations.

The report argues that in states that have banned deferred deposit loans consumers have lower credit scores and make less use of traditional credit options.

Perhaps the most convincing evidence in the study shows that the use of traditional credit in Georgia dropped significantly after the state banned payday advance loans in 2004.

Not surprisingly, the Kansas City Fed’s report is raising some eyebrows. A senior research for the Center for Responsible Lending found the study to be near-sighted and inconclusive. Attaching payday loans regulation to lower credit scores without looking at any other possible explanations.

The study’s author, Kelly Edmiston conceded that evidence as to the effects of short-term loans is mixed, and that he did not intend to campaign against bans, he simply aimed to inform the debate.
What the study does reinforce is that though numbers are concrete, statistics can be manipulated to support any argument.