The curious case of payday loans

The myth:

Critics condemn payday loans calling them ‘predatory debt-traps,’ so much so that many loan seekers consider payday loans taboo. On top of this, policy makers are set to cap these loans in many states. But the million dollar question remains, will a cap on payday loans actually help the financial stability of households to improve?

Georgia and North Carolina

Well, ‘certainly not’, if you go by the situations prevailing in Georgia and North Carolina. These two are the states which clearly indicate that consideration of payday loans as debt-traps is nothing more than a myth.

The truth:

Georgia and North Carolina are the two states who had banned payday loans in May 2004 and December 2005 respectively. Now going by the myth spread by the critics, household financial stability in these two states are supposed to be better as compared to others where payday loans are still legal. But, unfortunately for the critics that is not true.

Without payday loans, higher bankruptcy

As per the Federal Reserve Bank of New York staff report no. 309 by Donald P. Morgan and Michael R. Strain (published in November 2007 and revised in February 2008), post ban “households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate.” The situation in North Carolina is also not very different.

More bounced checks

After the ban, checks returned by the Federal Reserve check processing center in Atlanta have gone up by 1.2 million checks per year, which indicates an additional payment of $36 million per year as bounced check fees by the depositors. If these are the situations in these two states after payday loans are banned, then how can one say that payday loans are responsible for weakening financial health of the households?

Be rational

The situations in Georgia and North Carolina clearly suggest that slamming payday loans for a vulnerable household financial health is certainly not justifiable. Instead, it is the time when they should be praised for doing exactly what the country’s economy needs; influx of more money into circulation, and thus keeping the demand level afloat.

Further, one must understand the fact that despite ‘so called’ higher interest rates, payday loans are still cheap considering the cost of bounced check ‘protection’ sold by various credit unions and banks. And under the current economic scenario, when the economy requires constant thrust, all these things matter a lot for their reciprocate impact on the future.

Also we must understand that a normal buying behavior on the part of the consumers at the moment will go a longer way in helping the economy to recover than any stimulus package. Thus it’s actually the time to put aside the critics and their myths and show a rational approach towards payday loans.