There has been a myriad of scrutiny over the years regarding payday loans. One of the biggest problems that critics of payday lenders cite is that payday loans encourage a "cycle of debt" that many consumers simply are unable to escape. Interestingly, new university research proves that this belief may simply be a myth.
Clemson University Study Supports Payday Loans
However, a recent study by Clemson University rebukes this claim, and in fact, states that "there is no statistical evidence to support the 'cycle of debt' argument often used in passing legislation against payday lending."
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The Clemson University study also went on to say that the tight legislation often imposed on payday lenders does no more than increase the cost of doing business, which also means that consumers pay more as a result. In other words, the state legislation that is passed to protect consumers is actually hurting them.
Using data from 1990 to 2006, the Clemson University study not only proved the abovementioned points, but also showed that payday loans are like any other type of loan product, as they can be abused by the consumer.
For the majority of consumers, payday loans are used responsibly and are ideal for times when they find themselves in a financial pinch. Of course, there will always be a small minority of people that will use payday loans irresponsibly and quickly end up in over their head, but the large majority has proven, time and time again, that payday loans, like any other type of short-term loan, do serve a purpose and can be managed effectively.
For many, payday loans are a great option, especially when lower-cost forms of credit are not available. Many consumers look to payday loans to provide a solution to their short-term cash flow problems, and they often use them as an alternative to sky-high bank overdraft fees.
Dartmouth College Study
Another recent study on payday loans, one conducted by Dartmouth College, found that the restrictions placed on payday loans and payday lenders had the opposite effect of the intended goal.
The Dartmouth College study found that because of the tight restrictions placed on payday lenders in certain states (they used Oregon as an example), most payday lenders were forced to leave the state, thus causing a hardship for the state's residents.
The study went onto find that in states where payday lenders were overly restricted, consumers were forced to pay costly overdraft charges and late payment fees, both of which often exceeded payday loan APRs.
The bottom line is that providing consumers with access to credit can be beneficial in many cases. Payday lenders allow consumers to manage their cash flow and handle their finances, and they are an important financial tool for those individuals in an emergency situation.
The Dartmouth study's findings reaffirm what many consumers have already known for some time: that responsibly managing one's finances does not come in the form of tougher restrictions.
If consumers are left to make their own decisions, they will, in most all cases, make the most educated well-informed decisions and will use loan products, including payday loans, in a responsible manner.
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