Friday, November 18, 2011

Media Bias on Short-Term Credit Makes Boogeyman out of Payday Lenders, Lioni...

via Big Journalism by Lawrence Meyers on 11/7/11

The mainstream media loves to hate payday lenders.  That's because it's easy to paint them as villains without ever explaining the whole story behind the product.  So they publish article upon article attacking payday lenders without ever acknowledging that millions of consumers use it every year, with only an infinitesimal number of complaints.   The free market and repeated studies have determined that customers like the service, understand its costs and risks, and are left worse off when the option is forcibly removed.
But that's not enough for the so-called reporters. They also must bow at the altar of any alternative to payday loans, disregarding the disadvantages of those products, and not acknowledging that they are just payday loans by another name.  Nor do they compare those alternatives on an apples-to-apples basis to payday loans.  To do so would not permit journalists to present "heroes" alongside the short-term credit villain of payday lenders.

That's not to say these other products aren't great alternatives — which, in fact, they are.  I champion the introduction of an innovative product into the credit market, particularly at a time when credit is so restricted.  Case in point:  a nifty new service called Billfloat.  Billfloat will pay various types of bills (utility, phone, etc) on your behalf, up to $225.  They'll float you this loan and allow you to repay it in monthly installments.  The fees are competitive to those charged by payday loans.
However, while Billfloat doesn't call itself a payday lender, the company is lending against the most likely source for repayment: a customer's paycheck.  That's a payday loan.
Unless you're a journalist!
This article demonstrates the mainstream media bias of Jochelle Mendonca and Sharanya Hrishikesh.  They fail to account for Billfloat's $14.99 processing fee as part of the loan's cost, thus their claim of a 36% APR is incorrect.  It's a convenient omission, which goes hand-in-glove with another false claim, that payday loans have "rates as high as 500%," when the national average is actually much lower.  In addition, the authors neglect to mention that Billfloat's lending limit is $225.   The average payday loan is over $400, and in some states one can borrow as much as $800.  You may also use a payday loan for any purpose you choose, and are not simply limited to paying bills with it.  So Billfloat certainly makes sense for a certain niche, and its limitations are one reason for its cheaper pricing.  However, the authors make no mention of these facts.

Richard Piersol's article fawns over a new Nebraska credit union short-term product.  This $500 60-day loan has an apparent APR of 18% according to Mr. Piersol, except he neglects to mention that $20 processing fee.  He also omits that to obtain this loan, a customer must first be eligible to join a credit union, and be a member for at least 30 days.  To get a payday loan, however, all you need is proof of employment and a bank account, and you can get a loan immediately.  Again, you give up convenience for a lower price, but that goes unmentioned in the article.
Even the Wall Street Journal praised Virginia's public employee payday loan.  It has a fabulously low rate of 24.99% APR.  Then again, since it is offered by the government, there is no need for the lender to make a profit, a person can only get two loans per year, and a borrower must first complete an "online financial fitness course".  What else do they have to do, jump through a ring of fire? No wonder the loan is so cheap and so few of them have been made.  But the article never mentions that most borrowers want nothing to do with these restrictions, and that only a few thousand of these loans have been made since the program's inception.
Is anyone surprised?  I'm not.  The media needs to create sensational stories designed to induce rage in the readership.  It's much more dramatic to holler about payday lenders abusing Grandma's pocketbook then to present a balanced story about new products entering the credit market.  My old math teacher would have been appalled.
By the way, APR comparisons are not so cut and dry.  The APR for a given loan depends on the length of time of the loan and the principal.  Here's how other options truly compare to payday loans.  And by the way, consumers don't give a hoot about APR.  They respond to the flat pricing signal of the product — another fact conveniently ignored by the mainstream media.
Payday Billfloat NC Credit Union
14 days 391% 429% 540%
30 days N/A 215% 258%
60 days N/A 126% 138%
14 days 391% 478% 564%
30 days N/A 261% 281%
60 days N/A 171% 161%
14 days 391% N/A 618%
30 days N/A N/A 330%
60 days N/A N/A

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