The payday advance industry has received a great deal of criticism in recent years. Celebrities such as Sarah Silverman have publicized their opinions of payday loans, and President Obama has called payday advances “predatory.” In June, the Consumer Financial Protection Bureau, commonly called the CFPB, released its long-awaited proposed regulations for payday advances and other short-term loans. Despite the vocal attacks on payday loans, a strong argument can be made in favor of leaving the payday advance industry alone.
Why the Payday Advance Industry Should Be Left Alone
The primary opponents to payday loans are not the people who use the service. This became clear when the CFPB released 12,500 comments submitted to the agency by actual customers of payday lenders. Obtaining the comments required a request filed under the Freedom of Information Act, which many will not find surprising since 98 percent of the comments expressed a positive view of payday lenders and the loans they provide. Furthermore, a survey conducted by Harris Interactive showed that 97 percent of the borrowers using short-term loans were “satisfied.” A survey conducted by GSG/Tarrance found that 96 percent of the respondents found payday loans with direct deposit into their checking accounts very useful and stated they would recommend them to others.
Proposed Regulations Could Destroy the Payday Loan Industry
The CFPB refers to its efforts as an attempt to regulate the payday advance industry, but many critics feel that the proposed regulations could destroy the industry completely. In an opinion piece published in Forbes, Tim Worstall argues that what the CFPB is actually doing is abolishing payday lending. Worstall points out that when the economics of a business are killed, the business is also killed. Simply put, the new regulations undermine the business model of payday lenders and adds substantial costs to their overhead. Since the pending regulations will make payday loans much less profitable, lenders will choose to invest their capital in other endeavors.
Studies Show Regulations Could Harm Those They Are Intended to Protect
Numerous studies have shown that millions of people who use payday advance loans do not have access to other sources of credit when faced with a financial crisis. Most do not have savings accounts, and many do not have credit cards. Borrowing from family members, employers or friends is not an option for many individuals. Without payday lenders, cash-strapped individuals may find themselves pawning or selling their personal belongings, borrowing from an illegal source, writing checks without sufficient funds or accruing late fees because they cannot pay their bills on time.
It is interesting to note that the Pew Charitable Trusts — a long-time critic of payday loans — published an analysis in September 2016 indicating that the proposed regulations will “leave consumers vulnerable.” According to Pew, the new regulations will discourage credit unions and banks from offering alternatives that might have lower costs. Furthermore, the proposed regulations do not fully address the issue of high-cost loans with repayment terms in excess of 45 days.
A senior economist at the Federal Reserve Bank of Kansas City has expressed concern that the regulations will have adverse effects. Kelly D. Edmiston writes that restrictions on payday loans could limit consumers’ ability to maintain their credit standing, deny them access to credit or force them to turn to alternatives that will be more costly. Edmiston explores scenarios that could prove more harmful than a payday loan, such as an individual who loses a job or substantial income because he cannot afford to repair the car that is his only means of getting to work. Another scenario explored the damage that could be done to an individual’s credit rating should traditional loans or credit card bills be paid late.
If Payday Loans Are Great, Why Is the Industry Under Attack?
Payday advance loans are a credit product, and like any other type of credit, they can turn into a problem. Borrowers who take a payday loan for frivolous reasons or who do not have a plan for repayment can find themselves unable to make their payments when they are due. They may take out loans from several lenders and be unable to meet their obligations, forcing them to renew their loans repeatedly. This can lead them to become mired in debt without much hope of ever paying off all of their loans. However, if individuals borrow responsibly and formulate a plan to pay off their loans when they are due, payday loans can be an important financial tool for dealing with unexpected expenses.
If you are wondering whether a payday advance would be right for you, you can find additional educational articles about the topic at the Personal Money Store.