Yes, it was funny and had received over 1.7 million views on YouTube the last I checked, but is Oliver’s assessment of the payday loan industry fair or one-sided?
I will be the first to admit there are problems with payday loans and lenders – and just because some lenders – like any other businesses, choose to deceive or run their operations in a predatory manner that should not give a black eye to those who are trying to do things the right way. Also, the misuse of a useful service by an irresponsible person does not necessarily make the service bad in and of itself.
Two Things to Consider
So let’s look at two key facts of payday loans – demand and
responsible use.
First, as Oliver points out there are a lot of payday loan lenders – and if you understand the simple economics of supply and demand that means two things.
- There is a demand for the product — just like there is a demand for Starbucks coffee and McDonald’s fast food.
- Consumers can overuse or irresponsibly manage their intake of coffee, hamburgers, or payday loans.
In the case of the misuse or overuse of coffee, food of soft drinks, they can harm their bodies and physical health. Also, they can put their family or personal finances at risk if they overspend on lattes and hamburgers when they can’t afford them.
But is that really Starbucks or McDonald’s fault?
Or, does the person consuming their way to bad physical or financial health bear some of the responsibility.
The Problem with Oliver’s Rant
Does Oliver really understand what drives a person to seek a payday loan — or their alternatives?
Let’s be honest, probably not. He has a net worth of one million dollars according to www.celebritynetworth.com. If he gets in a tight financial spot, He can walk into any bank and borrow whatever he needs.
Consumers taking out payday loans can’t do that.
Why Most Borrowers Get a Payday Loan
Most payday loan applicants have to pay rent, keep the power on, buy groceries for their kids, take care of emergency medical expenses, or fix a car so they can keep get to work to earn money to pay their bills.
Unfortunately, their credit is usually shot, their credit cards (if they have them) are maxed out, and they’ve usually tried everything else.
The Alternatives to a Payday Loan
If they don’t get a payday loan they face eviction or disconnection of vital services, like power, water, or phone. They may even be tempted to overdraft their bank account or write a bad check, which will cost them a lot more in the end.
In fact, a report by the Federal Reserve Bank of New York found that “although much maligned for its high prices payday credit can be cheaper than overdraft credit.” Mainstream banks can circumvent interest rate regulations (payday lenders are subject to) by charging flat fees instead of a percentage of the overdraft. For example, if a check overdraws your account by $5, you may pay six times that – $30 in overdraft fees, not to mention additional fees charged by the merchant. In contrast, a payday borrower may only pay $15 to $25 per $100 borrowed.
(You can view the full report at http://www.hbo.com/last-week-tonight-with-john-oliver)
Now, I think we can all agree that everyone should resist the temptation to use a payday loan for a vacation or a night out on the town, but that’s not what most borrowers are doing with the money. Instead they use the funds for financial emergencies when they have no other credit options.
Why Payday Loans Have Higher than Normal Interest Rates
Higher interest rates are simply based on the fact that the lender is making a riskier loan. The economic reality is that a lender takes a bigger risk when it loans money to a borrower with bad credit or no credit. The bank knows from past data that more loans will go bad. So to stay in business, the lender has to make more off the good loans. This doesn’t necessarily mean it is gouging borrowers. The lender is simply charging more because of the risky nature of the transaction.
Coming Up With Better Options Instead of Merely Criticizing
Now we all understand that Oliver is not a financial expert or trained economist. He’s a comedian. His job is to make people laugh, to amuse and entertain them – not to teach them about economics or how to manage their money.
Unfortunately, today the lines between entertainment and news have been badly blurred. Now that topic may also be worth a screed by Oliver on the “Last Week Tonight” show.
But here’s the danger of taking these kind of funny bits too seriously and forming opinions without having all the facts. Journalism used to provide both sides of the story, but now it (particularly the TV variety) seeks to entertain more than educate or inform.
Bottom Line: Everyone Has a Part to Play
Should the payday industry as a whole work hard to weed out bad practices? Yes. Should borrowers make changes to their personal financial habits to pay back the payday loans on time? Yes. Should politicians, banks, and those with no credit challenges come up with better ways to provide short-term loans for emergency financial needs to those who can’t access traditional or normal loans? Yes.