As per the latest survey conducted by the Federal Reserve Bank of New York, banning payday loan actually hurts the economy. North Carolina and Georgia are the two states where these types of loan programs have been banned since December 2005 and May 2004 respectively. When they researched the effects of the ban on the households in these states, they found that there were more instances of chapter 7 bankruptcy filings, more complaints filed against debt collectors and lenders at FTC (Federal Trade Commission), and a significantly much higher rate of bounced checks as compared to other places where payday lending is legally permitted. They concluded their research by stating that when payday credit supply is reduced, the credit problems increase horribly.
How Effective Are The “Payday Holidays”?
The Federal Reserve Bank of New York compared the payday loan ban in Georgia and North Carolina with the forced “bank holiday” incident in 1933, when President Roosevelt had closed all banks in the U.S. as an effort to control money supply. The similar “payday holidays” (the only difference is that these holidays turned out to be permanent) in these two states proved to be a bigger failure. The states had put the ban in a desperate effort to save the households from getting into deep payday loans debt traps, but the survey finds that the households have actually been suffering horribly because of the ban.
It might be a matter of debate on how accurate the findings of the survey are, but one thing is for sure payday loan industry is a huge one. There is a growing demand for it, especially because of the alluring promise it makes. After all, it offers easy money to an individual when he/she is in a temporary financial crisis. The only thing that makes one suspicious of these lending programs is that they charge very high rate of interest, it can be 200% or even more. Sometimes, people end up paying more than double of what they actually borrowed.
Though the payday loan survey conducted by the Federal Reserve Bank of New York contradicts those who condemn it as a “predatory debt trap”, they are still consistent with the hypothesis that payday credit make better alternatives to bounced-check “protection” and other such products that banks, credit unions, and other lending institutions sell.
However, the CRL (Center for Responsible Lending) still maintains that payday loan “locks borrowers into revolving high-priced short-term credit that eventually turns out to be a never-ending financial liability.”
