Over recent years State governments have taken aim at the payday loan industry intent on disarming an increasingly popular financial service because of the misfortune of a small percentage of consumers. Politicians and writers have attached the phrases “predatory” and “cycle of debt” to slander the payday loan industry that has found an undeniable and legitimate niche as a financial solution for low income families and unexpected monetary problems.
Undoubtedly some consumers of payday loans have found themselves in more financial trouble than before, however, statistics show that they are overwhelmingly the minority. If States were to implement laws against financial products that could leave the consumer worse off we would also be waging war against credit cards, the stock market and own businesses.
Though the reason why so many states have implemented regulation against cash advance loans is because politicians believe that lenders inherently attempt to trap their customers in cycles of rollover loans, studies show that over 90% of all payday loans are repaid by the end of their original cycle. In fact, separate reports conducted by Clemson University and the Federal Reserve concluded that there is no statistical evidence of consumers falling into this “cycle of debt.”
In response to the claim that payday advance lenders target the poor, statistics show that over 90% of consumers have a high school diploma and over 54% attended college and over 40% of borrowers have an income of $40K a year or more.
Perhaps the most egregious and incorrect use of information in the fight against payday loans is the use of APRs to measure short-term consumer loans. These loans are typically 14 to 30 days, and an APR or annual percentage rate is naturally fitted to a loan of 12 or 24 times that length. The information the formula comes up with is therefore completely off-base and unreliable.
Payday loans – once again against popular belief – have been shown to be used responsibly. 70% of consumers use them to pay off bills. Therefore, let’s compare the APR of a standard payday loan to the alternative or missing a payment. A $100 payday advance loan carrying a $15 fee is equal to an APR of 391%, in comparison a $100 bounced check with the standard $56 penalty would result in a 1,449% APR. On the same note, a missed utility bill of $100 dollars with a late/ reconnection fee of $46 would equal an APR of 1,203%. Obviously taking out the payday loans to pay these bills on time is the much more affordable option. Not to mention, it prevents the damage to your personal credit that a missed bill would cause.
States like Montana and Arizona that have chosen to implement APR interest rates caps on payday loans are effectively asphyxiate the industry. As I stated above, a simple $15 fee on a $100 dollar loan equals an APR of almost 400%. These states have capped the APR at %36, thus lenders are legally not able to charge more than $1.50 per transaction, which would not even cover the fees to transfer funds. These laws are making lending unprofitable for loan lenders and are putting many of them out of business, leaving many would-be consumers without another option.
The unfortunate side of this misinformed war is the effect on the thousands of consumers who have not fallen into debt because of payday loans, have used them wisely, and no longer have that option available to them. Many of these people live paycheck-to-paycheck and are subprime borrowers with poor credit who banks would not offer loans to. Now where do these people turn when the unexpected occurs? Where a medical emergency forces them to choose between care and paying the bills?
Instead of having the State make the decisions for them, the onus should be on the consumer to decide whether a cash advance loan is right for them, and to manage their loans responsibly. It is their financial life at stake and they should be responsible for knowing the stipulations and consequences of the loan they are agreeing to. People should have the right to make their own financial decisions. Forcing the payday loan into extinction will only result in more would-be borrowers struggling to find an alternative to consumer loans than borrowers being protected by the ramifications of abusing them.