Wednesday, March 26, 2008

Will we see the end of Payday Loans?

Payday lenders appeal to people in desperate times, giving hope in the form of quick cash. Money borrowed through payday lenders is typically due by the next payday and can cost up to $30 per $100. To someone in need that can at first seem like a reasonable charge, but it translates to something like 650% interest. And usually when that next payday hits the borrower can’t afford to pay the loan.

So now Colorado hopes to join New York, Oregon, Ohio, Arizona and Virginia in putting a cap on payday lenders. Colorado proposes to reduce the interest consumers pay to 45%. Other states have set the cap at 36%. The Colorado bill, though moving forward, is stalled by proponents who worry about running payday lenders out of the state. Meanwhile Ohio (payday legislature is still in the works there) points to payday lenders as one of the primary causes for their crashed housing market.

So why is Colorado worried about the payday lenders?

In his counterpoint article for the Rocky Mountain News, Darrin Anderson, president of the Community Financial Services Association of America says:

The truth is that the customers we service every day are smart, capable, rational individuals. They may not have substantial savings, but they are perfectly able to manage their personal accounts. They are hard-working, responsible people who take care of themselves and their families. When they come to the decision to take out a payday advance, it is after they have carefully considered the cost of the service, compared it to the cost of alternatives and decided that the best value for their circumstances is a payday advance.

Colorado doesn’t need to worry. The Internet is another source of payday loans.

There’s always a loop hole. New York (one of the states to pass payday loan caps) is finding that Internet payday loans have also been pervasive. Internet lenders hit consumers with flashy banner ads. Unlike brick and mortar shops they setup automatic withdrawals from client bank accounts. This can add security risks since it requires account access. But the bigger risk is that the borrower doesn’t have enough money in their account to cover the loan and it’s fees. The lender will take what they can sending the borrower into NSF fees and keeping them in debt.

Are payday lenders a necessary vermin of every society? Should we call in the Pied Piper? Or are do adults have the right to freedom of choice as Darrin Anderson says?


  1. Your first paragraph explains the real problem. Usually when the loan comes due, the borrower is not able to pay it back. If you are not able to foresee two weeks into your financial future, and know that you will be able to pay back your payday loan, then you shouldn't get the loan. Period! Payday loans are not free money, they are a short term loan to get you through a couple weeks. We need to stop blaming the payday lenders for everyone else's irresponsibility! If I borrow 100 bucks from a friend, and am not able to pay it back, I don't blame my friend for lending me the money! That is just stupid. So why are we blaming our payday lender friends for providing a great service? In a recent article by ex senator and presidential candidate George McGovern, he says, "[p]ayday lending bans simply push low-income borrowers into less pleasant options, including increased rates of bankruptcy," Mr. McGovern rightly poses the question: "Why do we think we are helping adult consumers by taking away their options?"
    Later in the article, he says, "[t]he nature of freedom of choice is that some people will misuse their responsibility and hurt themselves in the process. We should do our best to educate them, but without diminishing choice for everyone else."
    This is how we need to look at this topic. Leave the payday loan stores alone and look for other options. Instead of taking away payday lenders, beat them at their own game by giving consumers even more alternatives!

  2. I like payday loans because the have same me so much money in over draft fees plus
    they are convinient they dont required so much information and they are more flexible than the banks.