Coalition for Responsible Lending in Tennessee

Payday Loans: Myths & Facts

Myth A payday loan is short-term, so it is inappropriate to refer to an APR when talking about them.

Fact These loans may appear short-term, but the truth is that the majority of borrowers cannot pay
back the principal in the time allotted and the loan is rolled over (i.e. flipped into a new loan
with exorbitant fees each time). Pay day loan customers average more than 10 loans per year.1

Myth The problem isn’t with the industry; the problem is that some irresponsible payday loan
borrowers don’t use these loans as they are intended.

Fact The business model for the payday loan industry is based on continually extracting money from
the repeat customer who gets stuck in a cycle of debt. While the industry claims that its
product is intended to help people get past the occasional emergency, repeat “serial”
borrowing (five or more payday loans per year) accounts for 91% of all payday loans. Only two
percent of borrowers who take out a loan don’t come back within a year for another loan.2

Myth Payday loans provide a more economical option than bouncing checks.

Fact Because most payday loans roll over multiple times with additional fees each time, they do not
present a better option than bouncing checks. In fact, many payday borrowers find that the
recurring fees resulting from rolling over their loan(s) RESULT in bounced checks rather than
preventing them. At best, a payday loan only staves off financial difficulties. Among frequent
borrowers, most report that the payday loan did not resolve, but merely delayed, the financial
problem that caused them to take out the loan initially.3

Myth Payday loans can’t roll over all that often because many states don’t allow them to roll over and
some payday lenders limit the number of rollovers allowed.

Fact When a borrower has reached the limit of rollovers at one payday lender, they are encouraged
to go to the “payday lender down the street” to take a loan out to pay off the first one. Payday
lenders don’t compete with one another they COLLUDE to keep borrowers in debt because
repeat customers are their main source of revenue.

1
AARP, “Payday Loans Don’t Pay” (2004)
2
Center for Responsible Lending (2004)
3
Center for Community Capital, UNC, “North Carolina Consumers After Payday Lending” (2008)
 Coalition for Responsible Lending in Tennessee
Payday Loans: Myths & Facts
Myth Payday lenders must charge high fees because of the high risks and high loss ratio associated
with this industry.

Fact The payday lending industry paints one portrait of their customers as middle class folks seeking
relief for a one-time emergency when they are accused of taking advantage of the poor. They
provide a very different picture when they try to suggest how risky their business is. Which is it?
The very name of this industry tells you that the borrowers are working and have a steady source
of income. The fact that so many are repeat customers also suggests that they are acting in good
faith. When payday loan data is collected and shared with the public, it shows that the industry
has a similar charge-off (“bad debt”) to more traditional financial institutions with significantly
lower APRs. In 2008, Colorado payday lenders charged-off only 4% of loans made, while their
loans had an average APR over 300%.4
The rapid growth of this industry is further evidence of the low risk and high profit associated
with payday lending. According to a Tennessee Department of Financial Institutions report, the
industry return on equity in 1997 was 30%.5 Tennessee is the second most saturated state in the
country when it comes to payday lenders, with one store for every 1900 households.6

Myth If the payday lending industry didn’t exist, it would harm sub-prime borrowers.

Fact Findings suggest that payday loans cause harm. According to research by Professor Paige Marta
Skiba from Vanderbilt University, payday borrowers are twice as likely to file for bankruptcy as
people who apply for such loans but are denied. 7 Skiba indicates, “Our research finds that
payday loans and their interest payments may be sufficient to tip the balance into bankruptcy for
a population that is already severely financially stressed.”8

4
State of Colorado Department of Law, Office of the Attorney General (2008)
5
Dept. of Financial Institutions, Report to the General Assembly on the Deferred Presentment Service Act at 9 (1998)
6
Stephens Inc., Update on the Payday Loan Industry: Observations on Recent Industry Developments (2003)
7
“Do Payday Loans Cause Bankruptcy?” Skiba and Tobacman (2009)
8
“Payday lenders’ clients find frequent loans costly: High Interest rates, accruing costs can lead to bankruptcy” The
Tennessean, 1/17/2009