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

By Nathalie Martin

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 here)

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. 

Full post as published by Credit Slips on August 26, 2010 (boomark / email).