Study: Payday loans do not cause bankruptcy

Payday loans do not cause bankruptcy, according to a recent study by economists at Clemson University.

Dr. Petru Stoianovici and Prof. Michael Maloney studied the relationship between payday lending and bankruptcy filings over the period from 1990 to 2006. Using state-level data on the legality of payday lending and on the number of loan stores, the investigators found that neither the legality of payday lending nor an increase in the number of loan stores led to higher rates of consumer bankruptcies.

With legal support from the Arkansas Supreme Court, Arkansas Attorney General Dustin McDaniel has pushed the payday lending industry out of the state. Near the end of 2008, Arkansans Against Abusive Payday Lending, an advocacy group opposed to the practice, reported an 86 percent drop in payday lenders in the state, from 237 operations in March to 33 stores operated by two companies.

McDaniel’s office isn’t buying the results of the Clemson study.

“We take issue with these findings and we expect a study to the contrary will be released soon,” noted a statement from AG spokesman Gabe Holmstrom.

And, Holmstrom noted in the statement, the Arkansas Constitution trumps conclusions from university studies.

“Regardless of the correlation between bankruptcy and pay day loans, the Arkansas Constitution prohibits loans in excess of a specific cap; the Arkansas businesses were exceeding that cap by several hundred percent in most cases; they were breaking the law,” according to the AG statement.

The AG’s office also cited this report from the Center for Responsible Lending which challenges studies that have a neutral or favorable position of payday lending practices.

The findings of the Clemson study are consistent with those of other investigators — including Dr. Donald P. Morgan of the Federal Reserve Bank of New York, and Prof. Jonathan Zinman of Dartmouth College — that access to high-interest-rate consumer credit correlates with improved household financial condition, according to a university statement.

The Clemson study results do contradict a Sept. 8 study by Profs. Paige Skiba and Jeremy Tobacman that found evidence that making a first payday loan application is related to increased filing rates for Chapter 13 bankruptcy filings.

“This study has important policy implications for legislators considering restrictions on consumer credit, including the interest-rate limitations put forth by President Obama in his economic stimulus proposal,” Maloney noted in a press release. “Despite their high cost, payday loans appear to increase the welfare of consumers by enabling them to survive unexpected expenses or interruptions in income. The study shows that, by a key measure of financial outcomes, payday loans are not harmful to their users.”

According to the Sept. 8 study by Skiba and Tobacman, an estimated 10 million American households borrow on payday loans each year, with the amount of the typical payday loan only $300.