How Do Payday Loans Work Blog

There have been many new laws and regulations either proposed, passed, in or in debate over short term loans, often called payday loans.  Many of the people that are bringing up the new laws and debate say that these loans lead to a ‘cycle of debt’ that cannot be broken and eventually lead people to bankruptcy.  However, contrary to popular belief, and to those that are trying to bring this debate to light as well as give it merit, short term loans do not lead to a ‘cycle of debt’ and that they don’t lead to bankruptcy.

A recent study that was conducted over a 6 year period from 200o to 2006, using state data from 1990 to 2006, by Clemson University and others, concluded that short term loans are not the cause of bankruptcies.  In fact further restrictions on the industry could hurt consumers by driving up fees, and that banning them completely would reduce the access to needed credit.  The study was conducted over a long period time using state provided data on bankruptcy filings as well as those that are getting short term loans, and they found no evidence that the two correlated.

Their results help to cast further doubt on the so-called ‘cycle of debt’ that many of the industry critics site as their main cause for action.  In addition, it helps to strengthen the need for short term loans or payday loans for those the need credit extended but can’t use the traditional methods for acquiring such loans.  Highlights of the report can be found in pdf form by clicking here, and the entire report can be downloaded from the main site.

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