The CFPB appears bent on destroying the cash advance loans industry with the new regulations that it has proposed. Are American adults so financially naïve that the government must dictate the types of credit products they can use? The Consumer Financial Protection Bureau seems to think so. The agency is not alone in its campaign to vilify cash loan lenders, but what many people seem to ignore is that the criticism leveled at cash advance loans is demeaning to the people who actually use them.
Critics of Cash Advance Loans Offer Demeaning Generalities About Borrowers
If the critics are to be believed, everyone who takes out a cash advance loan is financially incompetent. The critics argue that these borrowers are easily deceived by slick-talking payday lenders, cannot understand a written contract, do not know what an annual percentage rate is and are so financially inept that they fall into a debt trap from which they can never emerge.
The evidence, however, paints a very different picture. A study conducted by researchers affiliated with the Columbia Law School found that most people who took out cash loans had a good understanding of the terms. Approximately 60 percent were able to repay the loan within 14 days of the date predicted at the time of the loan. Most borrowers also stated that they expected to take out additional loans after repaying the initial one. In addition, the study found that over 50 percent of the borrowers had earned at least some college credits, disputing the critics’ arguments that payday lenders prey on the uneducated.
The criticism can be even more demeaning. According to the Critics of Cash Advance Loans Are Judging Borrowers
In an opinion piece appearing on Forbes.com, Norbert Michel points out that critics of payday loans are “making value judgments” and that “value is subjective.” Cash loans may not make sense to a well-heeled politician or highly paid celebrity; these people typically have money in the bank and access to “elite” credit cards. For millions of working Americans, however, access to a small cash loan can relieve financial stress, help them cope with an emergency or smooth out a period of irregular earnings. Therefore, these types of loans are of great value to the more than 12 million people who use them.
Celebrities have urged people to do “anything” other than take out a payday loan. This exhortation is itself demeaning. It assumes that borrowers have not already explored other options and found that a payday loan is their best choice. By “anything else,” do these people mean that borrowers should take a cash advance on their credit card, take the money out of savings or borrow it from their relatives? What if none of these options are available to them? In that event, does “anything else” imply that they should sell plasma, go without food or allow the electricity to be disconnected?
Critics of payday lenders are beginning to sound a bit like Marie Antoinette, who reportedly responded that the peasants, starving from a lack of bread, should eat cake. By applying their own sense of value, they are insulting those who use cash advance loans. To the critics, there is something more noble in meeting an unexpected expense by using a credit card or transferring funds from savings to their checking accounts. Whether they are arrogant or simply misguided is debatable, but the effect is the same — they belittle the people for whom cash advance loans can be their only lifeline.
Are High Fees Necessarily Predatory?
Critics love to focus on the fees charged by payday lenders, calling the rates “predatory.” They convert the fee into an annualized percentage rate, and when they do, they express outrage that the APR is in triple digits. However, these same critics never play the same game with the fees that their banks charge them to use their ATM cards. As explained in an article on TheHill.com, if a bank charges a $3 fee to withdraw $40 per week, annualizing the fees would yield an APR of almost 400 percent. Since payday lenders charge a fee rather than interest, converting the fee to an APR is an unfair comparison.
Are Cash Advance Loans Ideal for Everyone?
No single credit product is the ideal solution for every individual’s financial needs. Before making a decision on a payday loan, borrowers should research the advantages and disadvantages of this type of credit. To help borrowers make informed decisions, the Personal Money Store offers many educational articles.