Hawkins' Fringe Banking Premise is that Payday and Title Loans are Short-term: If Only it Were True

Although I disagree with the starting point of the paper Katie wrote about yesterday, Fringe Banking by Professor Jim Hawkins, and thus disagree with most of Professor Hawkins’ conclusions, I have great respect for him and am grateful that his paper is part of the national discourse on this topic. I deal with very poor people regularly and know some have no place else to go besides payday or title lenders when they need cash. Thus, I try to keep an open mind that on some level products like payday loans could serve some utility in the world, if they were truly used sparingly and for emergencies only. And if there were no rollovers and people could not use 10 or 12 of them at a time. In other words, if they worked the way Professor Hawkins says they do.

Jim’s paper gets a valuable idea out there, but the facts about how these products are really used, and how they are marketed, explain why these loan products create more problems than they solve. My own curbside data of payday use (read the long version or the short version) suggest that Professor Hawkins’ starting point, that these loans are designed to be short term and thus to keep people out of a cycle of debt, is out of synch with the reality of either borrowing habits or lender business plans. Still, his idea does start a conversation, and in this field the two sides do not talk. Period. The product designs he speaks of, if actually followed in practice, would make this type of lending much less abusive. I might even like these products.

But here is reality. Lenders do everything they can to keep people in debt. They call customers constantly, even in the car on the customer’s way home after they pay off or pay down a loan, and try to get them to take on more. Lenders have loyalty cards, “pay the fee four times, get the fifth period free.” Anything to keep people borrowing consistently and continuously. Borrowers keep the loans out far longer than one cycle, which turns the loans into long-term, interest-only loans. Customers have multiple loans out at one time, and the lenders know this through Teletrack and do not seem to care. In fact, through Teletrack, lenders know these loans are not typically used as short-term products, which is why it is disingenuous to call this short-term credit. So I have not given up on a loan product like this, but there would need to be a way to make the loans operate like Jim Hawkins says they operate. I appreciate Jim’s paper for showing us what that product would look and act like in reality, not just in theory.

Comments

[Kathy Minardi]

I worked in payday loans, their goal is to lock poor people in where they must keep comming back to redo it. This is how they make their money no matter what they tell you. They lead people to believe that the payback amount will reduce the loan. It does not. If your payday loan is 500.00 the fee is 87.50 alone, your loan is not reduced one cent.no way can poor people get out of this especially those on ss. The payday loan companies use databases in different states so they can write more loans, if they didnt no one would be able to use them. I have seen too many people hurt by these loans and I cannot understand why they are not banned or controlled better. I have heard that banks and politicians are hidden in the ownership of these places. please do not be fooled these places cause more harm than good and are now on every corner in poorer areas,15 in a 2 mile area should tell you something.

[Jim Hawkins]

Thanks for mentioning the paper Nathalie! I think I need to change the paper to make my position more clear. I don't mean to suggest that people only use payday loans for a short period. I know rollovers are an important part of the business model. My main point is just that the dollar amount is never high. I'm intrigued by the suggestion that people have 10 payday loans. Obviously, if all those loans are for low amounts, having ten is no worse than having one for a higher amount. But, I'd be really surprised if payday lenders let borrowers borrow much more than their biweekly pay even at multiple locations. The whole reason they use Teletrack is to ensure that the borrower is not committed to other lenders in an amount in excess of their paycheck.

[Nathalie Martin]

Fantastic comments, Ms. Minardi, and Jim. Ms. Minardi, I hope you'll comment after reading this. Jim, your post gets to an important piece of information. Do all lenders use Teltrack? Perhaps some do not, especially some of the more local lenders. Jim, you are right about lenders being unlikely to knowingly lend more than the actual net income, but I can report that at least some will lend virtually right up to the full net income, leaving little or nothing for living expenses. In one case, I know a series of lenders all located right accross the street from one another who sepcialize in loans to people on disabilty. A cusomter owes $100 each to five lenders and her monthly disabilty check is for $575. The lenders all know each other...any knowledge on the topic of Teletrack or multiple loans, Ms. Minardi?