Payday Loans – Symptoms of an Economy Failing Millions
While the Consumer Protection Financial Bureau, or CPFB, is busy looking for ways to reign in or decimate the payday loan industry, it’s becoming clear that payday loans aren’t the problem. Instead, they are the symptom of a failed system. When did the system fail? Some would argue that it never got off the ground.
Payday Loans – Symptoms of a System Gone Wrong
The payday loan industry is in the business of loaning money to those who are unable to borrow from traditional lending institutions. For decades, the market for quick, small dollar loans has been insufficient. The Atlantic reports that banks have long preferred making large loans to small ones. To lend out larger funds, traditional financial institutions require people to have solid credit histories and enough income to repay the money that they borrow. In today’s economy, this disqualifies many people.
Banks have avoided establishing lending options for those who are a month or two behind on their bills or living tighter than paycheck-to-paycheck. Because financial institutions have failed to offer these products, they’ve left the door open for payday loan lenders.
Payday Loans are the American Version of Microfinance
The term “microfinance” is more common in other parts of the world. This type of lending features short repayment terms and high interest rates. They are also directed at people who don’t have access to normal credit channels. These small-scale, pricey loans often cause people to remain impoverished because even a little extra debt becomes too burdensome.
The Washington Post published an article stating that microfinance options and payday loans aid the cycle of poverty. Does this mean that short-term loans are always a bad financial move? Not necessarily since these types of loans satisfy a need. In America, the most common reason for people to seek out payday loans is to cover an emergency.
According to reports, 47 percent of the country’s citizens don’t have enough in their savings accounts to pay for even a small emergency. Unforeseen car repairs, fewer work hours or an unplanned medical expense can quickly use up a family’s food budget. If other family members or friends are unable to help, then that leaves cash strapped people few borrowing options. When a person is facing starvation or a lost car, payday loans certainly seem like a better choice.
People are Using Payday Loans in Ways that They Shouldn’t
While payday loans are often the only borrowing option for some people when desperate financial situations arise, too many of them are using these funds for nonemergency situations. Payday loans are prohibitively priced. On an even more important note, these loans are behaviorally dangerous. If credit is tough to obtain, most people have second thoughts about making unnecessary purchases with it. When borrowers use payday loans to make needless purchases, they are paying even more for noncritical things.
Short-term loans that come with high interest rate terms should only be used for actual emergencies. It would be nice if lenders could refuse to borrow funds to those who are obviously making bad financial choices, but it’s impossible for them to dictate what constitutes an emergency. Americans are proud of their ability to choose, so it’s up to the borrower to make responsible decisions.
Solving a Problem Like Poverty
According to an article in Forbes, the war on poverty has been a failure. The country has devoted 50 years and $21.5 trillion to battling it. Unfortunately, poverty still exists. As long as it does, people will need access to short-term loans for low dollar amounts.
Currently, most of America’s support for low-income people limits individual choice. The country needs a system that helps people while giving them the power to make good financial decisions for themselves and their families. Research shows that the majority of low-income people don’t waste their money on alcohol and drugs. In fact, they usually make wise financial decisions, but a shortage of borrowing options is harmful to their financial wellbeing.
When Payday Lenders are the Only Place to Go for Quick Cash
In too many cases, a lack of funds for food forces people to seek additional money from payday loan lenders. When people are hungry, they need money fast. If the country eliminates the problem of hunger, it will get rid of a major reason why people need these loans. To provide even more support, the nation’s leaders should consider ways to encourage other financial institutions to enter the field and lend to low-income borrowers. To read more about why payday loans are a symptom of a failed system, visit the Personal Money Store.