President Obama's plans for the Consumer Financial Protection Agency could mean that debt relief is closer than ever for the downtrodden. (Photo: flickr.com)

The recession has forced America to face some of its most deep-seated systematic financial troubles. One thing that has become clear is that unscrupulous mortgage lenders and credit card agencies have dined for far too long upon consumers who largely didn’t understand that they could hold out for something better. Foreclosure and bankruptcy have amplified the burden on consumers, courts and the economy as a whole tenfold, which makes the question of how debt relief should be handled a more pressing issue that it has been in decades.

Cornell and George Washington Law School Economics lecturer and former professor Dr. Neil Buchanan ponders in a recent FindLaw column entitled “Should Federal Agencies or Courts Protect Consumers in Financial Markets?” which side of the regulatory coin America needs most. Existing regulatory agencies are being given more extensive duties by the Obama administration in order to help make America’s financial markets safe and sound. At the same time, new agencies like the newly minted Consumer Financial Protection Agency appears to be on its way to receiving unprecedented powers. In theory, it will have the power to police how mortgage lenders, banks, credit card companies, payday lenders or any other consumer finance company interacts with consumers. It is Buchanan’s opinion that allowing regulatory agencies to protect consumers is the best route, as relying solely upon the courts wouldn’t be enough of a deterrent to keep suspect lenders from indulging in bad behavior. The ideal system would have both in place as a regulatory enforcement clearing house.

But Isn’t This Big Government Clogging the Market?

Some will surely feel that way. What I have seen from state governments is an overzealousness to regulate payday lending, to the point where it is impossible for such legitimate businesses to operate in some states. Mortgage lenders and credit card company supporters would likely have similar complaints, although the path of destruction their industries have carved is rather hard to ignore. Buchanan begins his argument by considering the “courts only” option. If it were possible t regulating a market in need of deep repair like the mortgage industry through simple enforcement of the law, that would be ideal. However, Buchanan doesn’t see that as being enough. Sometimes the courts might work in favor of the consumer and debt relief, but not often enough. Extreme circumstances would be required to convince most judges to see cause to invalidate a contract. The “non-elite” consumers, as Buchanan calls those most in need of debt relief, would not receive the help they need.

There is precedent here, but it could be a one in a million kind of thing. Buchanan points to a New York Times story where a judge ruled that a homeowner’s mortgage debt could be completely discharged during bankruptcy. This loop in legal convention happened due to a technicality: the mortgage company couldn’t prove it had the legal right to collect payments on the homeowner’s mortgage due to the fact that their mortgage had been repackaged and resold so many times that the paper trail had been lost. The mortgage company claimed this was “standard procedure” now, but the judge wouldn’t accept such shenanigans. Since the judge wasn’t exactly sure who was due the money, he decided he couldn’t compel the consumer to make mortgage payments to any one party.

“Saved by a Technicality” Won’t Work for Everyone

Buchanan rightly points out that not all judges will be as determined to call mortgage lenders’ bluff in such situations. “Standard procedure” should hold in most cases, meaning that homeowners would still be legally obligated to follow the terms of their mortgage contract. And mortgage lenders have certainly learned something from that case and are making sure all paperwork is in order. Once again, the deck will be stacked against consumers.

Don’t Depend Upon Courts for Debt Relief

Courts enforce the law. When a consumer enters into any legal contract with a lender, the terms of that contract are in most case subject to enforcement by law. Buchanan considers the vast majority of consumers to be “grossly mismatched” against mortgage and credit card companies. Mandatory arbitration clauses, hidden interest spike triggers and means of computing interest are always written in the best interests of the creditor. Consumers often agree to such contracts because they feel they don’t have any other choice. New regulatory agencies may be able to curtail abusive practices that are currently considered legal, but until that time officially arrives, there is too little hope that the average consumer will be able to fight back through the court system.

Courts Have Been Friendlier to Finance Companies

Families can go to court to attempt to prove that they shouldn’t have to pay under the terms of less than legal contract. However, Buchanan believes most judges will stick to enforcing contract language. In turn, the lending companies themselves are effectively using the court system to compel consumers to pay, even if it is through wage garnishment.

What about “Equitable Doctrines” for Debt Relief?

Hoping that lenders lose their paperwork isn’t a good strategy. That’s where “equitable doctrines” come into play. These can create situations where courts might be willing to set aside otherwise valid contracts because they feel that it there were unconscionable circumstances that placed the consumer under duress or undue influence to sign. Buchanan draws our attention to the “doctrine of unconscionability” itself, claiming that it works in two ways. First, in terms of procedure, there is the scenario where a contract was formed under suspicious circumstances. Second, there is the scenario where the substance of a contract is deemed grossly unfair. If both conditions are met, a contract like a mortgage, credit card agreement, etc, will not be enforced.

Too Good to Be True?

Perhaps it is. It all looks great on paper, says Buchanan, but debt relief is hard to come by via equitable doctrines. Only the most extreme cases are considered by courts, and for most people, having trouble paying a mortgage or credit card they signed up for won’t be enough to sway a judge. This raises the question in Buchanan’s mind as to whether courts should be compelled by stronger legislation to accept equitable doctrine arguments based on things like unconscionability. But as with any other action fought through courts, the cost would likely be prohibitive. Moreover, lenders would still be favored because “losing a contracts case legally cannot result in a company paying punitive damages,” writes Buchanan. “If you lose a contracts case, you merely pay what you would have paid anyway; and if you win, you are ahead. Thus, from the standpoint of repeat players, there is no reason not to abuse your customers (except to maintain goodwill, which many of the companies at issue here have already forfeited).” Then there are plenty of consumers who simply will not have the stomach to sue or be willing to accept a lesser settlement.

Calling on the Government for Debt Relief

Traditionally, the government has remained behind the scenes while consumers have pursued their right to take debt relief matters before the court system. As Buchanan suggests, however, this route has not often proved itself to be effective for the average consumer. In situations where genuine signs of abusive practices and unconscionable contracts are involved, new government agencies could take up the baton and make financial regulation more consumer-friendly.

“An agency can be empowered by Congress to order changes in behavior, changing business practices broadly and generally in order to level the playing field on which financial institutions and their customers do business,” says Buchanan. There could even be scenarios where lenders themselves could support agency regulation over the courts. “Out of control lawsuits” that financial institutions claim burden them unnecessarily would certainly be something lenders would be willing to leave behind so that a regulating agency can rule on matters. “But that hypothetical,” Buchanan writes, “ignores the financial industry’s real agenda, which is to fight to maintain both weak legal rules (allowing them to win in court) and weak-to-nonexistent agency regulation.”

Congress, Act Now

New agencies are about to spring forth from the executive branch to regulate the financial abuse of consumers through deceptive practices. Congress is in a perfect position to arm these agencies with more consumer-friendly laws that will make reasonable debt relief easier to attain. It’s that kind of consumer protection that Neil Buchanan and most concerned consumers are in search of as America looks to emerge from the darkness of the recession into the light of a stronger domestic America.

Consumerism is American. Free market capitalism and payday loans are all part of necessary competition, despite what critics would have you believe. (Photo: flickr.com)

If media and banking industry critics of payday lending are to be believed, payday loan outlets are perched in the reeds, muscles coiled in anticipation of springing upon unsuspecting consumers. “Predatory lending” is the fallback term such misinformed critics use, under the assumption that people who use payday loans are tricked or somehow lured into doing so. Yet ample evidence exists that indicates that payday loan customers are educated and take time to consider their options before choosing the short term loan product.

Understand Who Uses Payday Loans

Edward Lawrence and Gregory Elliehausen studied who uses payday loans and why in their April 2008 Contemporary Economic Policy article “A Comparative Analysis of Payday Loan Customers.” Using a national survey that takes into account numerous payday loan outlets belonging to industry trade association the Community Financial Services Association (CFSA), the authors reach beyond the veil of anecdotal evidence as they interview 427 payday loan customers from the survey. Rather than finding an uneducated, unsophisticated group that is being victimized against their will or better judgment, Lawrence and Elliehausen found that payday loan customers consider their decisions carefully and weigh the cost of payday loans against other costs both monetary and environmental.

Consumers, Consumption and Debt Burden

Consumer credit fills a definite need, particularly for segments of society without a great deal of liquid assets at their easy disposal and a significant debt burden. Building upon Juster and Shay’s 1964 study “Consumer Sensitivity to Finance Rates: An Empirical and Analytical Investigation,” where consumer credit is seen to be used on household durable goods, and multiple studies that suggest that such a method is financially feasible when the rate of return is high, Lawrence and Elliehausen point toward a model where high interest payday lending may be optimal for certain consumers. The conditions under which the authors see this would be the case are “relatively high-return investment opportunities, low current income and strong preferences for current consumption.”

Yes, We Live in a Consumer Culture

Americans see it as their right (and their curse) to “keep up with the Joneses.” When this behavior is left unchecked, personal debt can spiral out of control. Thus, when consumers look to short term loans like payday loans to handle financial shocks, they do so in large part because they do not have the liquid assets available to handle their debt obligations in lump sums. Creditors know this, so they tend to limit the amount of credit they extend so as to protect themselves from default. Unsecured personal loans are available from payday lenders to make up the difference. They are available at a cost that the authors find consumers are more willing to swallow than more expensive or socially taboo alternatives.

The Rise of Rationed Borrowers

The authors refer to the Juster and Shay study in stating that borrowers constrained by their debt loads are “rationed” borrowers. Juster and Shay theorize that rationed borrowers are “in early family life-cycle stages where rates of return on household investments would be high.” Their income would be low to moderate, which would explain the small amount of liquid assets available. Furthermore, their demand for consumer credit would be connected less to interest rates and more to the general lack of standard credit available.

That’s the way Juster and Shay saw it in 1964, 45 years ago. Things have changed a great deal since then. Creditors have a greater technical facility for assessing and pricing risk, say Lawrence and Elliehausen. The requirements for equity have lessened and the time for short term loans to reach maturity have lengthened. Unsecured credit through bank-issued credit cards has also become more readily available. There is a “subprime credit card market” for today’s rationed borrowers, but there are other alternatives that do not deal so heavily in the constant spiral of revolving debt. Payday loans have been a prime alternative for rationed borrowers.

NOT Preying Upon the Elderly

Some critics of payday loans claim the industry preys upon the elderly. However, numerous recent studies indicate that young and middle-aged consumers have contributed to an increasing demand for short term loans. Their drives are somewhat different, as Lawrence and Elliehausen’s findings show. For the young, their demand for payday loans has been predicated on how quickly they can pay off their short term loans (seven to 20 days is standard) and hence regiment their budget, whereas middle-aged  consumers’ demand is more in tune with obtaining better interest rates.

Budgetary Discipline

This sense of maintaining a budget in the face of environmental pressures resonates through various other studies. Katona’s “Psychological Economics” (1975) indicates that consumers “may be reluctant to increase credit card debt because they fear that they will not have the discipline to make payments on the additional debt.”In this case, Lawrence and Elliehausen hypothesize that consumer use of payday loans via a standard contract may be expensive in a traditional sense, but if the alternative is increased vulnerability to higher debt or even an inability to access credit, the short term loans are preferable in the long run.

Survey Says

Payday loan customers surveyed by Lawrence and Elliehausen tend to break many of the stereotypical notions spread by critics of the industry. They are not in fact poor; just over half had family incomes between $25,000 and $49,999. Considering that having an active checking account is a requirement for obtaining a payday loan, unbanked households (generally lower income) are not being exploited by such short term loans. In terms of age, two-thirds were under 45 years old, with more than one-third under 35. Only 10 percent were 55 or older, so clearly the elderly is not being targeted. Family situations indicated more than half were married or living with a partner, and 65 percent of respondents had children under 18 years of age living in the household. These are young families with debt loads who are attempting to deal with financial shocks as best they can. Now that America is in a recession, I’m sure that if Lawrence and Elliehausen conducted their survey today, the numbers would continue to support this idea.

Do They Have Other Options?

The survey indicated that a whopping 91.6 percent of payday loan customers do rely on other types of consumer credit at times. However, considering the finding that payday loan customers are less likely to use revolving credit like credit cards, one would think that they find an advantage in using the more regimented payday loan model. I would offer that it is precisely that budgetary discipline discussed earlier that makes payday loans more appealing for these rationed borrowers.

Of course, having other credit options tends to go hand-in-hand with the potential for a greater debt burden. As such, the authors’ survey found that 73 percent of payday loan customers had been turned down or limited in their ability to secure other types of loans over the past five years. Payday loans become a necessity during financial emergencies if other options are limited. In fact, two-thirds of respondents claimed they used payday loans due to unforeseen financial events.

Making Informed Decisions

Lawrence and Elliehausen found that respondents to the payday loan survey tended to follow cognitive models suggested in other consumer credit studies. Specifically, they go through a process where they recognize need, gather details, consider options, decide and then evaluate how it went in the aftermath. As the majority of consumers in the survey appeared educated (the majority were high school graduates or had college experience), it would stand to reason that payday loan customers tend to display cognitive ability and efficiency. In the case of details like APRs and finance charges, greater education tended to equate to greater awareness (where such factors were considered important in the decision-making process).

Young Families Who Consider Options Carefully

Lawrence and Elliehausen’s findings speak to the financial realities facing many American families. They’re just starting out, their wages are not yet high and they don’t have many liquid assets lying around for a rainy day. Used in a non-habitual fashion, payday loans help absorb financial shocks during times of financial difficulty. They give consumers “a little control over their financial affairs they otherwise would not have,” write the authors. Is it any wonder then that customer attitudes toward payday lending were positive in the survey? There is peace of mind in being able to handle one’s own affairs. Since the majority of those surveyed did not show signs that they were using payday loans beyond the fashion for which they were intended, why is it that the government should be so gung-ho to step in with heavy regulation and taxation? By stymieing competition in a free market economy and restricting payday loan availability, aren’t they harming both consumers in need and their own capitalist system?

After a hearing on last week on the Payday Loan Reform Act, it appears that some legislators are beginning to see payday lenders as a necessary service instead of a predator.

A House Financial Institutions and Consumer Credit Subcommittee on April 2 discussed HR 1214.

Small differences

Many legislative hearings on payday loans have been inherently negative, with a focus on running so-called “predatory lenders” out of business. However, it appears that the consumers who want and need to have payday loans as an option are finally being heard.

The committee seemed to be in agreement that running payday loan stores out of business was not the desire of their constituents.

Enabling access

It seems the consequences of strict regulations shutting down payday loan businesses are finally being noticed. Thomas Reinheimer, CEO of Veritec Solutions of Jacksonville, Florida, recognized that good short-term credit regulation means consumers still have access to payday loans.

“We see first-hand the impact of good regulation in enabling access to short-term credit while protecting consumers from getting trapped in a downward debt-cycle,” said Reinheimer.

Facing facts

Reinheimer said his company “is at the forefront of implementing effective regulatory enforcement solutions for strong consumer protection.” He brought some statistics to the table to help other lawmakers understand the truth about payday loans and other forms of short-term credit:

• Borrowers and lenders are unable to roll-over payday loans in Florida and Oklahoma.
• Over 75 percent of borrowers pay-off their loans within 2 days of the due date.
• Grace periods and repayment plans are available under state law to any eligible borrower who can not pay off their loans on time.
• Over 25% of borrowers no longer use the product more than once per year and a majority of borrowers no longer use the product after 3 years.

Reinheimer said Florida and Oklahoma are good examples of payday lending regulation. Those states “two states that have effectively eliminated multiple loans and rollovers, clearly demonstrates that short-term lending can be regulated effectively,” Reinheimer said.

People do not trust big banks like they used to.

During this bad credit crunch, payday loans are becoming more common as other forms of consumer borrowing are falling. It appears that borrowers are getting wise about their options and avoiding turning to shaky financial institutions.

Consumer credit going down

Consumer borrowing has fallen for the third month in a row. This is partially due to the banks being less willing to lend. It is also because consumers are less willing to borrow. Consumers borrowed $6.6 billion less in December than they did in November.

But more people in more income brackets are using payday loans.

Good news for people with bad credit

One explanation for the increase in borrowing payday loans is bad credit. Many people who were sucked into the mortgage crisis now have black marks on their credit reports because of late payments. But because payday lenders generally don’t do credit checks, even people with poor credit histories can get much-needed help in financial emergencies.

Avoid risks with payday loans

Payday lenders are not in the optical illusion business.

The mortgage crisis taught a lot of people that what you see isn’t always what you get. Big banks gave big loans with small starting payments, and it seems those types of loans were more complicated than people thought. Not long after subprime mortgages became popular, homeowners began defaulting on their loans left and right.

In the case of the banks, when the banks began doing badly it affected consumers and borrowers negatively. Payday loans are simple, fast and short-term. They’re done through private companies. The company’s future performance won’t have any effect on your payday loan or how much you end up owing. You agree to the terms up front, and even if you have bad credit, with payday loans what you see is what you get.

Amelia Warren Tyagi has contributed a thoughtful editorial about payday loans and other forms of consumer credit in the Chicago Tribune.The title of the piece, “Stop Governing Credit Like It’s 1799,” refers to how laws may be pertinent at the time they’re written, but must evolve to keep pace with the march of time.

When the framers of the United States Constitution laid down the laws of the land, they could not have predicted a financial crisis of the magnitude currently faced. The laws protecting consumers were written during the formative years of the American Republic, long before mega-banks, credit cards or no fax payday loans. Once consumer safety laws began to appear, their intention was to protect consumers against dangerous products. Financial products, however, have always been an exception. Thus, the author suggests adopting financial product regulations that keep pace with the degree of protection afforded consumers by standard product regulations.

Financial products can be dangerous, but…

Part of the problem is that American law looks at financial products as a contract between equal parties, rather than as products that can potentially be harmful. As the author points out, this way of viewing financial products is the same as it has been in America since colonial times. Back then, “the typical contract was between a merchant and a shopkeeper who were haggling over the price of a handmade plow.” Faxless payday loans were, of course, unimagined.

Is it still an equal transaction when the average consumer is negotiating with a monolithic bank? We may be financially savvy, but the average person doesn’t have the time or legal resources to negotiate terms on the same level as a bank or credit card company.

Why is there such an imbalance now?

Most financial agencies are designed primarily to protect banks. As states’ rights eroded following America’s Civil War, much of their ability to dictate laws was lost, and Congress did little to fill the gap when it came to finance law. The Federal Reserve’s recent announcement that it will restrict credit card companies is one sign of movement (even though it is not a government agency), but the author calls for more to be done.

Striking a balance between regulation and overregulation is difficult

Tyagi believes that mortgages, car loans, payday loans and other financial products should be regulated by a Financial Product Safety Commission (based upon the Consumer Product Safety Commission (see http://www.cpsc.gov/)). The primary goal of this new organization would be to “review financial products to ensure that they do what they’re supposed to do, without any hidden dangers or unreasonable tricks.”

What such an organization cannot and should not do is  try to save people from themselves. Charging too much, taking out a mortgage larger than can be easily handled – these are potential dangers in consumer credit, but buyers must exercise their own restraint. The same holds true with payday loans. Lenders encourage customers never to borrow more than they can afford to repay. If payday loans are used responsibly, they can be a real lifesaver during small-scale crises. Used without restraint, they can cause problems, just the same as credit cards or gigantic mortgages (albeit on a much lesser scale than the latter two). Ideas like those of Amelia Tyagi are good, but we must always be careful not to give up our individual right to free choice in favor of big brother government overregulation.

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Thank You for my Financial Success

Recent academic studies of the no fax payday loan industry suggest in a clear, supported manner that the loan product is imminently useful to consumers with less than perfect credit who require short-term budgetary assistance. Dean Karlan of Yale and Jonathan Zinman of Dartmouth recently published a study entitled “Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts” which can be found at http://www.cepr.org/Pubs/new-dps/dplist.asp?dpno=6180. In this study, a strong case is made for not only allowing no fax payday loans, but encouraging expanded offerings of microcredit to all, but particularly those who have been traditionally unserved or underserved by the banking establishment.

Microfinance – born of necessity

Microfinance loans began with the intent of serving consumers who are seeking to build their financial futures. Establishing or improving credit, which is necessary in order to transact with banks, is a primary indicator of financial well-being. By benefiting individuals in this way, short-term payday loans can also be an essential ingredient in regional financial upturn, helping citizens one at a time. Karlan and Zinman found that such loans produced “significant benefits for borrowers across a wide range of economic and well-being,” and hence this form of short-term consumer credit “can be welfare-improving.”

Karlan and Zinman find that expanded access to credit significantly improved average outcomes, and they accomplished this by studying the financial well-being of borrowers for many months after they have used the services of a payday loan.

• During the six to 12 month period, borrowers were “significantly more likely to retain their job” when compared with a control group, and incomes were higher. Households involved in the study, when compared with a control sample, were also less likely to experience hunger, and had more positive views on their financial prospects

• From 15 to 27 months, Karlan and Zinman reported that those without credit established credit scores, and that scores did not decrease due to the use of faxless payday loans

Costs of payday loans didn’t harm consumers

Admittedly, the study did find that the median loan size was about 40 percent of the sample borrower’s gross monthly income.Payday loans in the sample were even taken at the extrapolated annual rate of 200 percent, even though they were not 12-month loans. However, economic downtown was not an observed result of borrowing, and after the six to 12 month period, households were not more likely to take out another loan. This flies in the face of the “cycle of debt” model that is popular in media analysis.

Payday loans are found to be beneficial

“We do not find any evidence that expanding access to consumer credit reduces creditworthiness over a two-year horizon. If anything, the treatment seems to have had a (socially) beneficial impact on creditworthiness by increasing the probability of obtaining a credit score,” write the study authors. “Most importantly, we do not find any evidence that the net effects of expanded access to consumer credit are negative.”

If media outlets looked to sources like Karlan and Zinman, who provide more than anecdotal evidence regarding the worth of payday loans, their stories would be credible. However, then the media would have to report the truth – that the payday loan is not the indicator of financial apocalypse, but a tool for economic betterment.

Rightly dividing your expenses utilizing a budget will help you to save more.

When it comes to creating a budget, many don’t know where to start. So many bills, so many expenses, all due at different times of the month; small wonder people need payday loans. Its quite easy to get lost or frustrated during the process.

Implementing a budget will help you build credit, pay bills on time without the use of payday loans, credit cards or other third party financial services and prepare you successfully for all your future financial goals ranging from family movie nights at your local theater, exotic vacations around the world or retirement.

Debt And Money Management

When it comes to debt, we all have it, and we all hate it, but we don’t have to live with it. The primary reason why we as consumers fall into the cycle of debt is because we fail to know where we stand financially on a day to day basis.

The average American consumer possesses $9200 of consumer credit debt which could be avoided through implementing basic money management practices through easy to implement tools and strategies such as a personal budget.

Budgeting Today For A Better Tomorrow

For the duration of this article we will examine the fundamentals of creating and implementing a financial budget. Often times people associate budgeting as a deterrent or restriction to their ability or right to have fun.

It’s true that you may have to make some sacrifices but often times budgeting your money leaves you with more money to both have fun with, pay your bills and pay down your debts.

Be Careful Not to be to Conservative

When budgeting your finances be careful not to eliminate the entertainment or fun in your life as eventually you will lose interest and focus on budgeting altogether. Instead, learn to compromise or moderate the funds you allocate towards entertainment expenses.

For example if your used to going out to lunch five days a week, cut back to three. If you go to your local cinema once a week, cut back to two for two weeks out of the month and rent a movie for the other two.

You don’t have to sacrifice much to save a lot. You simply need to know what your spending and then learn to spend those funds in moderation and find cheaper substitutes for the same activities.

Track Your Expenses

The first thing you need to do before developing a budget is to discover where all your funds are currently being allocated. To do this you will need to use a ledger to track all your daily expenses for one full month. This needs to include any and all expenses both big and small.

After the month is over, you can categorize your expenses and come to terms with how much you are spending and where you are spending it. You can then make educated decisions on how to better allocate your funds and moderate excessive spending.

Pay Yourself Before Anything Else And Build Your Savings

Off the top of your budget each month try to allocate around ten percent of your funds to a savings account before doing anything else. We all have rainy days sometimes and having a source of emergency funds available without having to borrow payday loans will prove useful.

Maxing Out Your 401K

Apart from contributing funds to a savings account, be mindful of your 401k as well especially if your employer is willing to contribute. There are not many places where you can get free extra money and although you won’t see your 401k funds for a long time, this is an excellent way to get ahead and meet or exceed your financial goals for retirement.

Matching 401k options from employers will usually only match funds up to a certain amount. Do your best to contribute enough each month so that by the end of the year, you are getting the maximum amount of contributed funds to your 401k matched as possible.

Remember, it’s free money and the extra cash that is contributed to your 401k by your employer becomes larger over time making this opportunity even more important to take advantage of.

Spending with cash instead of credit will help you make decisions that will save you money.

Getting Use to Cash Instead of Credit

Once you have allocated funds in your budget to put towards monthly bills, investments in your 401k and or your personal savings account, you should designate a modest sum of what is left over for monthly fun and entertainment and use the rest to get ahead on credit debt by paying extra towards the principle amount owed.

The funds you set aside for entertainment purposes should be set aside in cash. Doing so will help hold you accountable to your budget and what you have alloted yourself to spend. Being able to see the amount you have or have left, will prevent you from spending these funds wastefully and help you spread your transactions equally throughout the month. You may end up thinking about payday loans less.

Spending cash out of your wallet or purse will catch you making decision such as

“Do I want to go out to lunch with my friend or buy that new CD I have been wanting?” or “Do I want to treat myself out to espresso this week or go to a movie with refreshments this weekend”

With a credit card we never have to make these decisions and end up surprised when we see the new balance on our monthly statement.

Make the effort. Take the plunge. Do what is best for you and your future starting today by creating a budget for your finances.

Posted Courtesy of personalmoneystore.com, your payday loans source.

Lithograph by Edward W. Clay. Praises Andrew J...

Regulation is Harmful

Numerous studies citing recent examples like those by Jonathan Zinman of Dartmouth University and noted financial analysts Donald Morgan and Michael Strain for the Federal Reserve give us clear statistical examples of how overly tight regulation of payday loans is harmful rather than helpful. However, this recent study by Efraim Benmelech (Harvard University Economics professor) and Tobias Moskowitz (University of Chicago Business professor) looks into America’s past to give readers a more complete understanding of the historical impact and cycles of usury legislation.

Benmelech and Moskowitz indicate that such financial regulation is close correlated with restrictive political and economic policies that have been traditionally designed to exclude lesser groups and protect the interest of powerful incumbents. As banking history in America goes back much farther than the faxless payday loan industry, it is the well-established incumbent to the upstart short-term consumer lender. Usury laws help the incumbents; the incumbents are also typically involved in key lobbying against payday loans.

“The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century”

This is the title of Benmelech and Moskowitz’s paper, and while it may seem that by focusing almost entirely on the financial landscape of 19th century, the authors pigeonhole their report into a category less than practical for modern times. Such is not the case, however. This is the primary question they pose in the report:

Do usury laws serve as a social insurance mechanism that transfers wealth across states of the world and households in the interests of social welfare? Or, do private interests with political power impose usury laws to benefit themselves and impede competition? In short, do usury laws protect the poor or financially distressed, or do they reward financially strong incumbents by limiting access to others?

After studying both private and public interest scenarios, Benmelech and Moskowitz find that powerful banks (incumbent groups) have historically used regulation to “capture rents at the expense of other groups by imposing maximum legal rates.” Thus, said incumbents produce a effect in which they benefit from these usury laws, in that other groups seeking foothold in the market payday loan companies in our more modern example, and by extension consumers) cannot access finance as easily.

State governments have supported the incumbents

From the authors’ conclusion:

When the cost of regulation is low, private interests impose tight restrictions to extract rents and impede competition. When the cost of regulation is high for those private interests, states relax the constraints. We find that financial regulation is also correlated with other restrictive political and economic policies adopted by the state that are designed to exclude other groups and protect incumbent interests.

As it was true for 19th century America, much the same is true now. In Zinman’s “Restricting Consumer Credit Access:
Household Survey Evidence on Effects Around the Oregon Rate Cap,” we see that there was a definite negative connection between capping the rates of payday loans in Oregon. As the Dartmouth professor predicts more such regulation to come – following the path of history as Benmelech and Moskowitz show – consumers interested in the tenets of freedom should take in the reports named here and be sure that their Congressmen and Representatives are familiar with the work. That is one of the most effective ways to combat the unchecked dominance of incumbent banks that would limit consumer’s ability to access affordable credit. Competition must survive.

The face of payday loans in New Hampshire is changing, and consumers in need are in a position to reap the benefits. But Advance America is eager to point out that their new product is not payday loans, but a “Credit Line Product.” Whatever you call it, it is yet another innovation from the cash advance industry that banks and credit unions simply cannot match.

Coverage by the Concord Monitor spends a great deal of time reminding the public that payday loan businesses are going to be capped at 36 percent APR on January 1, 2009, and that the cap will effectively banish an industry with “outrageous” APRs that are “typically at 500 percent.” No matter that the payday lending industry provided jobs to 200 New Hampshire residents, per the reporter’s findings.

Once more, with feeling: payday loans aren’t annual loans

Here are comparable options to taking out payday loans, with their APRs attached for your consideration. If this isn’t well-known by now, it should be:

$100 payday advance with a $15 fee = 391% APR (if it were an annual loan, which it isn’t)
$100 bounced check with $54 NSF/merchant fees = 1,409% APR
$100 credit card balance with a $37 late fee = 965% APR
$100 utility bill with $46 late/reconnect fees = 1,203% APR

Yet journalists rarely display an understanding of this

What the Monitor reporter seizes upon is that Advance America was prompted to offer this new, open-ended small loan product by the potential loss of their previous payday loan business. However, they are not simply rearranging the deck chairs in order to stay alive, they’re positioning themselves to continue to prosper. Oh, and they’re helping consumers in the process. It would be a mutually beneficial arrangement.

While it is true that the new product would be free of the new restrictions that keep no fax payday loans under a 36 percent APR cap, the APR from the resulting “Credit Line Product” would be agreed upon by both lender and consumer before a contract is made.

It is not a payday loan

Advance America wants to provide consumers with a “Credit Line Product,” which bears no small similarity to a credit card for those with less than perfect credit. It would be a line of credit, ranging from $500 to $700, that consumers could access via withdrawal advances $10 increments.

Here’s a great feature: if the customer pays off their debt before month’s end, no charges are added. If a rollover occurs, Advance America charges an APR of 365 or 465 percent, with the former rate going to those who elect to allow the company to deduct payment directly from their bank accounts.

It is freedom of choice for payday loan customers

According to Advance America, the company has no plans to shut down any of its 24 branches in New Hampshire. With something like the Credit Line Product in their corner (which would work for consumers and those who distribute payday loans, they won’t have to. Consumers will continue to have access to short-term cash relief during financial emergencies.

Banks and credit unions are uncomfortable with this competition

For banks, the competition from payday loans is fierce.

They’re fighting for that market share by offering small short-term loans at annual rates as low as 12 percent. Perhaps they will see the folly in offering such a product at such a rate. It is not financially viable, as no fax payday loan companies have found.

Flip it, flip it

The Times reporter cites the belief held by organizations like the CRL that borrowers trap themselves by using an additional lender to pay off their first faxless payday loan (if rollovers are not available). As shown previously, however, most borrowers pay off their loans on time and use very few loans per year, as the above cited CFSA statistics show.

Yet critics blindly persist

CFSA spokesman Steven Schlein is quoted by the Times reporter as saying

Consumer groups are very effective at using that 3- or 4% of horror stories about people who misused the product and got more loans than they can afford. Most payday borrowers earn $25,000 to $50,000 a year. Why would you have a business model to make loans to people who can’t pay you back?

Critics claim that the profit margins for no faxing payday loan companies is outrageous. But according to a Vanderbilt Law/Oxford University co-study from December 2007 at http://www.economics.ox.ac.uk/members/jeremy.tobacman/papers/profitability.pdf, faxless pay day loan companies turn only about 10 percent profit per year due to the risk the small percentage of delinquent borrowers pose.

Consumers have spoken in favor of payday loans

Consumers look to no fax payday loans for the help they require if cash emergencies threaten. Academic and corporate researchers have shown evidence speaking to the value of the loan product. Even independent corporate analysts like Utendahl Capital Partners‘ Daniel O’Sullivan have admitted that

At the end of the day, there is a need for the product, so it comes down to finding something that makes sense for everybody — something the companies can make money at without putting people into a debt spiral.

Speaking of independent parties, is the Center for Responsible Lending (generally faxless payday loans most vocal critic) a party that is merely concerned for the welfare of consumers? Hardly. As you can see, Martin Eakes, who sits on the board of that organization, is also in charge of Self-Help Credit Union, an organization that was in prime position to steal payday loans customer base in North Carolina once the lenders were ceremoniously banned with their own short-term loan products.

Payday loans, says Check Into Cash founder W. Allan Jones, is “the craziest business. Consumers love us, but consumer groups hate us.” According to this recent Los Angeles Times article, that’s where the divide seems to be, and in their estimation, that is a problem.

“Critics say they trap the working poor with steep interest rates; lenders say they provide a needed service,” say the newsprint propagandists, and yet customers continue to seek payday loans in person, online and via the telephone. Since it’s clear people aren’t being forced into using payday loans, why do they choose them? Perhaps because they’re fast, convenient, inexpensive when compared with bouncing checks and paying late fees and discreet in relation to your credit report?

It’s easy to apply, which critics mistake for entrapment

Swing and A Miss

With identification, proof of steady employment and a checking account, a consumer in need of quick cash to over expenses if a surprise threatens their between-paychecks budget can use payday loans.
“Americans now pay as much as $8 billion a year to borrow at least $50 billion from payday lenders, by various estimates,” says the Times. Let’s look at that. $8 billion is actually only 7.5 percent cost, which is not out of the ordinary when paying back a loan, is it? Was that statistic supposed to be scary?

Payday loans are busting out all over

The author of the Times piece goes to great lengths to point out how payday loan establishments have proliferated, in a negative way. Yet does an abundance indicate a problem? Do not these stores provide jobs during difficult economic times?

The ubiquitous notion of “cycle of debt” is also addressed in the article. Yet according to the Community Financial Services Association (CFSA), of the few states that permit loan rollovers, CFSA-member lenders can only offer four or fewer. Thus, recycling the same debt is made quite difficult, and in such a situation, a loan can’t last longer than eight weeks. Moreover, regarding repeat borrowers after the initial loan is repaid, researchers and state regulators surveyed by the CFSA and other institutions consistently show that 70 to 80 percent of customers use payday loans anywhere from once a year to a maximum of once per month. This does not indicate chronic patterns of consumer financial abuse.

Living without a cushion

While it is true that many people live without a savings cushion for difficult times, it is also true that Payday loans cannot be honestly connected to any form of financial ruin. Reports by investigators like Dartmouth University’s Jonathan Zinman even show that the absence or unreasonable capping of interest rates can have a detrimental effect upon the populace. Individual responsibility and discipline is vital to one’s success in any endeavor. Payday loans, like pain medication, alcohol or potato chips, are useful when used in controlled moderation. Just because the “Twinkie defense” worked doesn’t mean that juries and judges aren’t ever temporarily insane.

Speaking of cushions, larger brick-and-mortar payday loan companies are designed with family comfort in mind. Seating is available, the lobbies are clean and easy to navigate and many provide toys to occupy young children while mom or dad is waiting to speak with a teller. In some cases, outlets are even located inside big box stores like Wal-Mart, as well as grocery stores or other big retailers.

TUNE IN HERE for the exciting conclusion of “Payday Loans | L.A. Times Swings and Misses” to see how the short-term loan is a product whose time has come.

Despite the fact that payday loans have been a boon to cash-strapped consumers who need a little help between paychecks, bank-controlled government acts in the best interests of their campaign supporters, rather than in the best interests of the people. Some take this path, while others recognize their value. Unfortunately with the former, it is overregulation at its finest.

Trying to keep the people’s choice down

A Congress-imposed 36 percent annual percentage rate cap on no fax payday loans to military personnel exists, and some states have banned payday lending. Even president-elect Obama supports such legislation, which will effectively put the lenders out of business. Thirty-six percent APR is not a supportable business model for loan-only companies. Families with less-than-perfect credit who need quick cash support are left out in the cold when payday loans are not available.

The Center for Responsible Lending (CRL) claims that 90 percent of payday-lending revenues “are based on fees stripped from trapped borrowers.” However, numerous independent studies, including this one by researchers from Chapman University, Colby College and the University of Virginia find that “payday loans help the subjects to absorb expenditure shocks and, therefore, survive.”

Supporters of faxless payday loans come from all walks of life

U.S. Sen. George McGovern, who once vied for the presidency, is a supporter of no fax payday loans. In an opinion piece he wrote for the Wall Street Journal, McGovern objected to those who sought to ban the consumer loan product. In particular he noted that the costs for payday loans are:

Reasonable when all your other options, such as bounced checks or skipped credit-card payments, are obviously more expensive and play havoc with your credit rating.

Regarding Federal Reserve findings, McGovern went on to say that

Payday lending bans simply push low-income borrowers into less pleasant options, including increased rates of bankruptcy. Net result: After a lending ban, the consumer has the same amount of debt but fewer ways to manage it. Why do we think we are helping adult consumers by taking away their options?

The Federal Reserve study found that patterns of bounced checks, complaints against lenders and debt collectors, and federal bankruptcy filings increased in Georgia and North Carolina after those states banned payday lending.

How does the Center for Responsible Lending counter?

They questioned the methodology and conclusions drawn by the Fed, but in the revised version of the Fed’s report, the authors respond in detail to each objection raised by CRL. Their response can be seen at the link above.

Capping rates hurts consumers; just look at Oregon

In still another study, Dartmouth College economist Jonathan Zinman looked at what happened in Oregon after it capped interest at 36 percent but also allowed lenders to charge “origination fees” of up to $30. That means the highest possible effective annual interest rate charged in Oregon by payday lenders is now just less than 154 percent.

Zinman said the immediate effect of the rate cap was to reduce the number of payday lenders in Oregon from 346 on Dec. 31, 2006, to 82 outlets in September 2008. He compared Oregon with the neighboring state of Washington, where an existing payday loan industry underwent no changes in the same period. According to Zinman:

Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

Now Montana wants to try 36 percent

Keep in mind that at 36 percent, payday lenders could charge only $1.38 on a two-week loan for $100, which now brings in $15 at some establishments. Factor in state licenses, annual examination fees, rent, lights, salaries, benefits and other incidentals and you can see that loan volume would have to be beyond massive. It simply isn’t a good business model.

Montana Banking Commissioner Annie Goodwin is quoted in this Billings Gazette story as saying that the 36 percent cap “would most likely shut down the payday lending industry, based on what has happened in other states. During the 2007 Legislature, my division opposed legislation that would have capped interest rates at 36 percent.”

Why do payday loan opponents persist?

They know that people want payday loans to be an option when they need quick cash in an emergency between paychecks. They also know that if payday lenders can be regulated out of business with unreasonable rate requirements, there will be a customer base that will come running to the next best thing. Exercise your right to choose, tell your Congressmen, Representatives and governmental officials what you think about having the freedom to choose payday loans.

Credit cards are a very useful and popular financial tool.  Cash advance loans can be, too – if used responsibility.   Maybe too popular as consumer credit spending has become America’s favorite pastime whether we can afford it or not. I won’t give you a bunch of do and don’ts right now about how to carefully and effectively use your credit cards to avoid this cycle of debt, but I will be sure to do so later.

Shopping for Plastic

Oh, curse those fashionable clothes and great deals!

We as consumers are so “plastic crazed”, that I thought I would do a quick article on credit cards themselves.

You see, the credit card industry is so highly competitive for consumers’ business, and we as consumers are so hungry for this plastic money, that much of our credit trouble comes to us before we even make our first purchase, and then we end up having to get cash advance loans to prevent a mountain of interest.

Credit cards as we all know provide us with a revolving loan otherwise known as a credit limit. When applying for a credit card we tend to focus primarily on the credit line or the total cash value that we can charge to the credit card. Unfortunately we must be more diligent with our search criteria because there are a few hidden fees that can cost us a bundle. One in particular will cost us even if we never choose to place a transaction on the card.

Be sure to choose your credit card provider rather than let your card provider choose you. It’s easy to get excited when you get the pre-approved notice in the mail, but this is just a ploy to win your favor by allowing you to think you have been approved so that you walk through the steps of applying.  Don’t do it just yet – you’ll be applying for cash advance loans in no time to pay it off.

When applying for a credit card always be careful to read the terms and conditions of the contract. You may be surprised at what you find there.

Annual Fees

The first thing you should look for is the yearly “Annual Fee” charge. Typically these fees will run from $39 to $99 each year. This is just for having the right to carry the card. Your account balance will begin with the annual fee applied to it for your first year of use.

Remember there are plenty other creditors that would love to have your business, so stay away from those which want to charge you an annual fee.

Interest Rates

You will also want to pay close attention to the interest rates. Interest rates are calculated in terms of APR or Annual Percentage Rates and can vary greatly between providers. The standard interest rates will be around 18 to 24 percent if you’re just beginning to establish credit, and less the longer your relationship with the creditor lasts.

Don’t think however that your creditor will choose to lower your APR by themselves. You may have to call from time to time and make the request. Upon request they will review your account and make a determination.

Cash Advance Loans

The next fee you will want to look for are the cash advance loans fee. This fee refers to the percentage or amount charged to your card whenever you choose to obtain a cash advance from a local ATM machine. This too can vary to some degree and may be of less importance to you if you just tend to charge your purchases straight to the card.

Follow these tips when shopping for your credit card and remember to “spend responsibly”. Credit cards can help you leverage and save your money as well as present you with a host of other benefits such as cash and travel awards, but these benefits are lost if the card is used improperly.

Good Luck! Hope you catch a big limit with small fees.

Feeling like a slave to debt? Debt consolidation can help.

In yesterday’s article “Debt Consolidation | What Are Your Options?” We identified some criteria that would help you determine whether or not debt consolidation was something that you should pursue, or if payday loans could help you out.

We also listed a few possible solutions you could begin pursuing if you felt you were indeed a candidate. These were credit card transfers, home equity loans and borrowing money or small interest loan from a noted family member or friend, or payday loans through a reputable lender.

If you didn’t feel that these were options worth pursuing, perhaps today’s article will present a few more solutions for debt consolidation that will appeal to you a little more.

Borrowing Against Your Life Insurance

If you happen to have whole life or permanent life insurance and have been paying into it for some time, you may be able to borrow against it. Obviously you signed up for your life insurance to help secure the financial future of a loved one in case of an accidental or premature death, so consider the consequences carefully. The nice thing here with whole life insurance is that you don’t have to pay back the whole amount borrowed if you aren’t able. It simply comes out of what would be given to the beneficiary upon your passing.

Your Local Credit Union

Credit Unions offer loans at interest rates that are typically lower than that of most standard banks. If your credit is still decent and you have identified your need for help before defaulting on your accounts, you may be able to apply for and get approved for a loan to pay off your creditors. Since most consumer credit card accounts carry interest rates around 20% , you may be able to lower your monthly payment and pay your debt off quicker with a loan from a credit union which will typically carry interest rates of around 10%.

Consumer Credit Counseling Agency

For many burdened by debt, this may be your best option. Nonprofit consumer credit card agencies provide counselors who work with and understand your situation as well as your need to get out of it. These counselors also have experience in dealing with and negotiating with creditors. With the stress and burden that you are already likely feeling, this a solution that will take care of the stressful leg work for you.

Typically, these agencies will take into account, organize and restructure all your outstanding debts as well as the payments you are making on those debts. They will likely get any accrued late fees you have accumulated waived and get your interest rates lowered as well.

Negotiate with your credit lenders on the premise of default

Be upfront with your creditors. If you feel you are about to go into default on your home mortgage, credit card or other consumer credit accounts, talking with your lenders may be all it takes to get you back on track.

Your creditors do not wish to see you go into default. If you express that you are on the verge of defaulting on your accounts or even worse, going bankrupt, your creditors are very likely to throw some more favorable terms your way.

Creditors are very much aware of the consequence of you going into default or bankruptcy. If this happens they will lose everything that you have left to pay them. If they can keep you paying your debt by extending you more favorable terms, they will, and payday loans may be worth looking into if you only miss a payment here or there.

No matter what your means of consolidation are, finding one quickly is essential to gain control of your debts before they begin controlling you.

On behalf of Personal Money Store, we wish you financial health and prosperity.

Part III, “The FTC, LPD, & You | Pillars of Protection When Identity Theft Strikes“, we talked about the immediate procedures that need to be taken with the local and federal authorities, to protect yourself as well as to help nail your assailant.

Today we are going to focus more on addressing the specific damage that has been done to the various accounts which have been compromised.

Credit and Debit Accounts

Dealing with the fallout from identity theft is tedious but necessary.

All credit card and or debit accounts that have been affected need to be immediately notified. Notify first by a phone call to put a stop to any further transactions from taking place, but also you will need to follow up your phone request with a letter or statement explaining your circumstances. You will most likely be asked to include a copy of your fraud affidavit or identity theft report and explained in the part three of this series.

Be sure to send this to the appropriate mailing address as it will differ from the address that you send your monthly payments to.

You will also want want to request new cards be sent to you. Don’t forget to change the passwords to your accounts as well. Remember, these passwords should not be chosen after things such as birthdays, maiden names, pet names, social security numbers etc. Choose a password that is random and unrelated to you. This may be harder to remember but will be the most secure.

Dealing with Debt Collectors

Depending on the amount of time that elapses before you discover that you have become a victim of identity fraud, you may start receiving calls from debt collectors requesting payment on the debts that your opposition has acquired on your behalf.

Debt collectors can be relentless in their pursuit of delinquent funds and it is easy to become agitated and quickly frustrated with these individuals. What you will need to do is politely tell the collector that is calling, that you have become a victim of Identity fraud and collect any and all necessary information regarding the debt. This would include things such as the following,

1. Name and contact information for the issuer of the now delinquent account
2. The amount of the debt,
3. The account number
4. Dates of the the charges

Ask the debt collector if they will need a copy of your identity theft report or fraud affidavit. You will also want to follow up by writing to the debt collection agency explaining your situation in detail and ask that they confirm in writing that you do not owe the debt in question and that the account has been closed. Having this in writing is important if you need to clear up credit discrepancies on your report with new creditors before the bureaus remove the mark on your report.

Stolen Checks and Fraudulent Banking Activities

In the event that the identity thief has set up fraudulent bank accounts in your name and issued themselves checks to use at their leisure, you will want to be sure to have your bank report it to ChexSystems. ChexSystems is defined by Wikepedia as follows,

ChexSystems is a check verification service and consumer credit reporting agency like Experian, Equifax and TransUnion. While most credit reporting agencies broker data about how a consumer handles credit relationships, ChexSystems provides data related to how a consumer has handled deposit accounts at banking institutions.

Be sure to place a security alert on your ChexSystems file. The contact information is below. This works much like the security alert we spoke of placing on the Credit Bureaus earlier in this series. Close any and all banking accounts that you expect to be compromised or are compromised already. After stopping payments on all checks that you have not been able to account for you will once again have to set up new accounts and passwords. Here is the Check Systems contact information.

• Phone: (800) 428-9623. Fax: (602) 659-2197
• Web: https://www.consumerdebit.com/consumerinfo/us/en/index.htm
• To place a security alert on your ChexSystems report: https://www.consumerdebit.com/consumerinfo/us/en/chexsystems/theftaffidavit/index.htm Write: ChexSystems Inc., Attn: Consumer Relations, 7805 Hudson Rd., Suite 100, Woodbury, MN 55125.

Many times victims of identity theft don’t realize that they have become victims until the stores where they shop begin refusing there checks. This usually means that Chexsystems and the other major check verification companies have your account flagged for fraudulent activity.

Fortunately under new federal law, you as a consumer can obtain a free report once a year from each of these check verification companies just as with the credit bureaus. The information for each of the major verifications services is listed below.

Fidelity National Information Services

No one is immune! Regularly checking your credit reports can minimize your risk greatly.

(was Certegy)(800) 437-5120
www.fidelityinfoservices.com

SCAN

(800) 262-7771
www.consumerdebit.com

TeleCheck

For annual file disclosure
Fraud, id theft department
(800) 366-2425
(800) 835-3243
(800) 710-9898
www.telecheck.com

CrossCheck

(800) 843-0760
www.cross-check.com

Although, you can’t eliminate your risk of identity theft completely, you can substantially reduce the damage resulting from identity theft by keeping a close eye on your credit and check service reports. This will allow you to identify fraudulent activity earlier and limit your liability.