Fed. Reserve VP Says Payday Loans May Not Be All Bad

San Francisco, CA -- (SBWIRE) -- 10/22/2012 -- New payday loan locations are currently a no-no in Birmingham and some local residents would like it to stay that way.

While high interest rates, up to 17.5%, and accusations that the institutions are set up to prey on minorities have soured the perception of short-term lending for many in the Alabama city. there is some economic research that suggests that the loans aren’t all bad.

While statistics from the Pew Charitable Trusts do not deny that race is a good predictor of whether-or-not someone will take out a payday loan, 4% for whites and 12% for blacks, payday loans have found a defender, of sorts, in Federal Reserve Bank of New York vice-president Donald Morgan. Morgan argues that personal finance practices, and not race, are the cause of the seeming discrepancy in payday loan rates between white and black Americans.

“When we control for demographic and financial variables, the race gaps fall dramatically. Conditional on demographic and financial characteristics, black and Hispanics are not significantly more likely to use payday credit than are whites,” according to Morgan.

He even defends the high interest rates, saying that as high as they are, they are often cheaper than other available alternatives. The VP studied the impact of payday loan bans of overdraft fees traditional banks charge and determined that short-term loan fees are lower than overdraft and bounced-check fees.

Data from the Pew Trusts showed that half of survey respondents said they would seek other means of paying bills that could end up costing more, such as pawning personal possessions, ignoring bills or taking loans from family members.

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