Bankruptcy

Hot Pursuit of Customers: The Real Reason More People are Turning to Payday Loans

By Nathalie Martin

As one who studies the advertising and marketing plans of payday and title loan companies, I was interested in two Wall Street Journal articles published this week on the topic of payday loans, one claiming that Dodd-Frank has pushed many consumers into the hands of payday lenders, and another describing how hard payday lenders are working to steal customers from banks. Since many payday loan customers do not fully understand the terms of the loans, it isn?t that hard to steal customers from banks.  Payday loans, often at least ten times more expensive than credit cards, are easier to get. The lenders are far friendlier to customers and have more locations and business hours.  Plus, have you seen the advertising? It makes it sound easy and even fun to take out a 500% loan.  Payday loan industry experts now claim that their toughest business challenge going forward is not collecting on bad loans but finding enough new customers to keep the hundreds of thousands of stores afloat. Payday loan volume dropped $38.5 billion in 2009, or 24% since 2007, in part because of state regulation. Industry has successfully dodged regulation in some state, mostly by claiming that customers desperately need these loans for emergencies. The truth of this statement seems critical to the survival of this industry, but let?s look at the industry?s advertising and the real uses of these loans.

Payday lenders are getting quite desperate for customers, and thus now offer loyalty programs to get people to refer their family and friends, whether these friends and family members have an emergency or not. They offer similar loyalty programs to get people to keep the loans out longer, whether they have a continuing emergency or not. They offer more loans as soon as one loan is paid off, whether the customer has an emergency or not. The advertising suggests that people use the loans to get through the holiday gift-giving season, even to go out to eat! It is time to really study how these loans are being advertised, and also to look at how they are actually being used. My own data show that less than 10% of the loans are actually used for emergencies. 

As for this idea that Dodd-Frank is the driving force in pushing people into the hands of payday lender, this is not the case. Customers were borrowing from payday lenders when they could use banks well before Dodd Frank or the Credit Card Act. The real cause of this shift is the payday loan industry?s own search for customers, as well as their advertising, which claims loudly and repeatedly that payday loans are good for anyone or everyone, any time, and are not just for emergencies.

Full post as published by Credit Slips on January 05, 2011 (boomark / email).