University Studies Argue Against the Idea of Payday Loans Encouraging a Cycle of Debt

Two recent rather enlightening studies, performed by both Clemson University and Dartmouth University, have shed light on the many criticisms and misconceptions of payday loan companies.

Critics have often placed blame on payday loan companies, saying that they take advantage of consumers, that they promote a “cycle of debt,” and that they generally use irresponsible and devious practices.

The two separate studies conducted by Clemson and Dartmouth find that these conclusions are often misleading and simply untrue.

Tight Restrictions Equal Fewer Consumer Options

For example, the Dartmouth study found that the tight state restrictions placed on payday loan companies simply force the financiers out of that particular state. Subsequently, the state’s consumers that cannot easily obtain credit have very few options, yet face skyrocketing fees and late charges from banks and creditors.

Many critics of payday lenders argue that the APRs charged by payday lenders are unfair and excessive, but what they fail to understand is that overdraft fees charged by banks often far exceed the APR charged by payday lenders.

The Clemson University study also points out that tight state restrictions on payday loan companies do nothing to protect consumers, and furthermore, simply forces payday lenders to charge more to consumers for their payday loans, as restrictions increase their cost of doing business.

The Clemson University study uses statistics from 1990 to 2006 to support its findings.

Leaving the Decision up to the Consumer

In addition, these university studies clearly show that payday loans can be abused by consumers, but that number is small and relative when compared to other types of short-term loans. In other words, there will always be a few individuals that abuse loan programs, but the majority of consumers use payday loans in a responsible fashion.

The studies conducted by both Clemson University and Dartmouth University show that restricting payday lenders accomplishes the opposite of what is intended. Instead, it should be left up to the consumers – not the state – to decide whether a payday loan is right for them.

The bottom line is that payday loans serve as a very useful financial tool for consumers across the country. The recession has left many consumers unable to obtain credit, which then leaves them in a very vulnerable financial position should they need cash to cover short-term expenses.

Payday loans provide consumers with a very practical service, as it enables them to eliminate paying bank overdraft fees and late fees, and it also helps consumers to get quick cash for general expenses and for emergency situations – all without a credit check or in-depth loan application.