New York’s Payday Lending Ban

Ordinary people in New York who have less-than-perfect credit face regulatory pressure to do what politicians decide is “good for them” as free enterprise, self-determination and the rule of law take yet more hits from “well-meaning and concerned” politicians and the big banks.

Despite overwhelming evidence showing that ordinary working people from the lower end of the economic spectrum support and rely on payday loans in overwhelming numbers, politicians and established lenders continue to chip away at the industry because it’s an easy target.

This conflict between what people want and what politicians do “on their behalf” for political advantages is astonishingly clear in New York State where the establishment has not only outlawed payday loans for its residents but also declared that payday borrowers are no longer required to repay their loan obligations.

Details of the New York Payday Lending Ban

New York State has taken one of the toughest positions in the United States in opposing the payday lending industry. Citing the state’s existing civil and criminal laws against usury or charging excessively high interest rates, the state’s legal establishment has determined that payday loans are illegal whether offered in-person, by telephone or through the Internet. The reasons for the ban, as explained by The New Economy Project, include the following politically correct sound bites:

Payday loans come with annual average interest rates or 400 percent or higher.
These loans trap people in cycles of debt despite the industry’s consistent advertising assertions that the loans are meant only for short-term cash emergencies.
The loans are offered to people who can’t afford to repay them.
Payday lenders take advantage of people from the lower end of the economic spectrum.

Spurred by such political organizations as New York’s The New Economy Project, official government websites and consumers are advising New Yorkers that they have no legal obligations to repay their loans and that debt collectors can’t pursue collections in the state.

Two Sides to Every Conflict

There are always two sides in any conflict, and New York’s payday lending ban shows the truth of the classic proverb. The first argument against New York’s policies regarding payday loans is the most important — people support and use payday loans in overwhelming numbers because many of them have bad credit, no credit and no resources in financial emergencies. Payday loans are so popular in the United States that there are now more payday lenders than McDonald’s franchises in the country despite bans in states like New York.

Answers to New York’s Reasons for the Ban

Payday loans are meant for financial emergencies, and the industry supports responsible use of short-term loans. It’s undeniable that people become trapped in cycles of debt, but this also applies to traditional loans, credit cards, auto financing and home mortgages. The banking industry’s mistakes during the mortgage crisis of 2008 are well-documented, but attacking the payday loan industry refocuses consumer outrage against traditional lenders to an easy-to-attack scapegoat: payday lenders. Regular New Yorkers — which includes students, veterans, retirees and people who’ve made a few mistakes managing their credit — are easier for politicians to target, supposedly for their own good.

Average annual interest rates of 400 percent are certainly too high, but the keyword is “annual.” Payday loans aren’t meant for long-term financing but only as a temporary resource until the borrower’s next payday. However, the payday industry faces the same administrative expenses for processing short-term loans for smaller amounts of money as banks have when approving big loans for extended repayments. If you apply the same logic to traditional lenders’ late fees, penalties and returned check charges, the annualized interest rates for a $37 late fee is 965 percent and more than 2,000 percent for a $32 fee on a returned $100 check. Payday loan companies can’t survive unless they charge higher interest rates than those charged by the banks that finance large loans over several years for people with excellent credit.

The costs of traditional lending are hard to understand because they’re disguised as other things such as late fees, penalties, loan defaults, collateral, consolidation loans and long-term financing. People who qualify for “low-interest” loans only do so after spending thousands of dollars in interest during their lifetimes. Low-interest loans have longer repayment periods than emergency payday loans, so banks and other traditional lenders earn huge commissions over time from people who have demonstrated that they always pay their bills. Payday lenders process smaller loans for very short periods of time, and offering loans to people who have lower credit ratings means that more borrowers don’t repay their loans. Ironically, New York State actively encourages its citizens to default on their payday loans.

The New Economy Project in New York promises to build a new economy that’s fair to everyone based on cooperation, racial justice, economic sustainability and democracy while ignoring what its citizens really want and encouraging policies that disenfranchise New Yorkers who come from lower economic and minority backgrounds. An article on the American Banker website warns of the dangers of banning payday loans because it destroys an essential lifeline for millions of people.

There are always different sides in any controversy, and regular working people — and even high income earners — lose an important resource when they’re not allowed to choose whether to get a payday loan in an emergency. If you want further information about New York’s payday lending ban, visit us at the Personal Money Store.

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