A Better Alternative
Payday loans are a form of consumer microlending, typically made in small amounts ranging from $100 to $1,500. These short-term loans are used for a variety of reasons, most common among them being when people need to take care of emergency expenses that a budget fails to cover. They have helped many families and individuals to avoid greater financial trouble by keeping their budget afloat until their next pay period.
Critics of the product frequently cite the expense as being problematic. However, the value of speed, convenience, discretion and having access to small amounts of credit that banks and credit unions do not otherwise provide are consistently overlooked by this argument. If a customer has less than perfect credit, the value of conveniently placed outlets (online, in person or via telephone) for no fax payday loans cannot be overstated.
The term “usury” has been attached to payday loans by some, and this argument typically stems from directions given in religious texts. Hinduism, Buddhism, Judaism, Christianity and Islam express varying degrees of objection to usury, but what is usury? The standard definition is “the practice of charging financial interest in excess of the principle amount of a loan.”
Give payday loans for nothing, why don’t you!
Adam Smith, the "Father of Modern Economics," supported charging interest
If we assume the previous definition of usury to be true, it becomes easy to laugh at the complete impracticality of the anti-usury movement in a capitalist society. If a legitimate business that aids consumers by making no fax payday loans available is forced to give this money without charge, customers will only have to repay the principle balance. There is no risk protection for the lender under this model, and since we do not live in a Utopian society where everyone is trustworthy enough to repay their debts (a virtue that numerous religions praise), risk protection is necessary. That is what interest achieves, in a sense. That is what keeps payday loan businesses from closing their doors and placing hundreds of thousands of honest, hardworking people out of a job. It is an engine of trade/exchange that keeps capitalism moving.
Arguments in favor of traditional usury are plentiful
Ethically, usury is defendable. The concept of “negative liberty” argues that restricting trade (in the case of payday loans, when the borrower voluntarily enters into a contract with the lender) hinders free will. Eighteenth century French philosopher Claude Helvetius gave voice to the concept this way, where the man in possession of negative liberty is free to make his own decisions:
The free man is the man who is not in irons, nor imprisoned in a goal, nor terrorized like a slave by the fear of punishment
In practical terms, welfare economics also explains the necessity of traditional usury. This type of economics looks at social welfare, or the overall well-being of society. Charging interest leads to profit, which is necessary for business operation, payday loan or otherwise. This solves the economic calculation problem by distributing resources (money, in this case) appropriately so that commerce can continue. Profit earned via interest meets the definition of dividend in the sense that by paying things like business expenses and employee salaries, the profits payday loan businesses make are invested back into the business, which can then continue to serve the public at a high level. Perhaps those who criticize usury on religious grounds could benefit from added perspective. Times are different now from when the texts originated; capitalism was thousands of years away, and current economic conditions were foreseeable by no man, woman or child.
Defending against risk
Charging interest in a competitive debt market is unavoidable if both profit and protection against borrowers who default are to occur. Incidentally, the Community Financial Services Association (CFSA) states that “researchers and state regulators consistently report that 70-80% of customers use payday loans between once a year and about once a month.” Thus, a statistically significant portion uses the loans sparingly. Moreover, since loan rollovers are either prohibited or severely limited nationwide, “borrowing from Peter to pay Paul” is both difficult to accomplish and statistically insignificant in frequency.
Interest and the free market
A significant movement supports the connection between just interest and a free market capitalist economy. Numerous Austrian economists believe this. They also believe that a free market will help set fair price. This would exclude excessive government regulation on rates, whether they be for payday loans or otherwise.
What would Shylock do?
To an honest citizen who cares about the well-being of others, it would be ridiculous to suggest that the violent repayment method suggested by Shakespeare’s Shylock is appropriate. However, there needs to be checks and balances in place like profitable interest if payday loans will continue to operate as a business. Numerous academic studies suggest that if the service were to be absent, consumers would turn to more dangerous alternatives. Interest is essential.
I we bank or put caps on the interest rates of payday loans, we are only going to add the historic high numbers of unemployment. Isn’t the whole point of getting out of recession to create jobs to boost the economy not take them away?