Payday Loan Article in Time Magazine (Must Read)

A must read in Time Magazine titled, Meet the New Payday Loan Customer: Middle-Class, Well-Educated.

What I found interesting about the article:

A recent study conducted by the Urban Institute found that, in 2011, 41% of American households reported using what the agency calls “alternative financial services,” according to Boston College’s Center for Retirement Research. That’s up from 36% in 2009, in the midst worst recession since the Great Depression. About a quarter of all households used an alternative financial service within the past year, F.D.I.C. data studied by the Urban Institute revealed, and about 12% had used one in the 30 days prior to the research being conducted.

About 14% of households turn to what the Urban Institute calls “nonbank credit,” a term encompassing payday lenders, pawn shops, rent-to-own contracts or tax refund anticipation loans. Roughly one in six used these services for the first time between 2009 and 2011. Nearly half said they did so just to meet basic living expenses.

About two in five people who use payday loans or who get loans from pawn shops do so because they think it’s easier or more convenient, researchers found. About half that number say they can’t get a small-dollar loan from their bank.

The most surprising increase came when the Urban Institute broke down use of products like payday loans by income. The poorest Americans, those who make $15,000 or less a year, actually scaled back their use even as wealthier people — those who conventional wisdom would assume had access to banks and credit cards — turned to alternative financial products in higher numbers. Among households with incomes between $50,000 and $75,000, the number went up by about a percentage point; for households earning over $75,000, the jump was two percentage points.

Consumer advocates believe that “payday” lenders prey on poor people.  What they fail to recognize is that the industry is providing a service where the demand eclipses the supply.

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