Payday lenders don't deserve to be labeled "sharks." Image from Wikimedia Commons.

Over the past few years, the term “predatory lending” has been brought up a lot, and the term is often leveled at payday lenders. The payday lending industry has been called just about every name in the book. These accusations are inaccurate. Furthermore, it isn’t fair to level these terms at the typical short term loan lender. In fact, it is hard to call any lending institution a “predatory lender.” The reason is that no one really knows what that phrase means.

Predatory lending didn’t exist until 1994

In the wake of the mortgage crisis, there has been great outrage at “predatory lending,” a buzzword of the last two decades. According to Adair Morse and others who have studied whether payday lending is predatory, the term was first coined in 1994, and rarely used until at least 2000, and didn’t gain prominence in the national lexicon until after 2005. The phrase, like others, are conjecture at best. A small loan lender is no more a predatory lender than a mortgage company.

The spread of buzzwords

There is a social phenomenon known as “buzzwords.” Some of them are tied to legitimate concepts, but any buzzword should be viewed with a skeptical eye. Many of them have differing meanings and fuzzy logic. The term “predatory lending” would presume that a loan was lent to a person who was desperate, couldn’t understand the terms, or couldn’t really pay it back. Since the typical payday advance lender explains terms well, and can’t afford to lend to people who can’t pay the loan back, that standard can’t really be applied. However, that is only a subjective definition. Someone else could think something else entirely.

Who is really predatory

Think of the debt burdens many think of as “good.” A new car costs almost $20,000. A new house costs over $150,000. These debts can lock a person into a lifetime of payments only to never realize the benefits of ownership. That sounds far more predatory than a loan until payday. You can read more in the payday loan facts and statistics report on Personal Money Market.

Payday loans can help you save some coin. Image from flickr.com/moneyblognewz

There are plenty of financial experts who claim that if you’re in a situation where you need same day loans, there are consumer payday loan alternatives offered by banks and credit unions that are less expensive. However, as sources like ConsumerAffairs.com indicate, many of these bank and credit union quick loans available the same day are burdened by their own high fee structure. A recent study by the National Consumer Law Center (NCLC) reviewed hundreds of different types of small, same day loans that banks hype as payday loan alternatives and found them to be less than desirable.

Payday loan alternatives: Shouldn’t they be cheaper?

Setting aside the much-referenced academic study that shows that same day loans aren’t actually expensive, the truth is that when it comes to payday loan alternatives, most do not improve upon the model they’re designed to replace. Lauren Saunders of the NCLC stated in the report that “too many providers of so-called payday loan alternatives hit consumers with some of the same onerous provisions that predatory lenders use to saddle unwary and vulnerable borrowers with loans they can’t afford to repay.”

Report co-author Leah Plunkett agrees, stating that while “Many genuine payday alternatives are in the market,” many of the alternatives are worse financially than payday loans. Specifically, Plunkett references check account cash advances from such big banks as Wells Fargo Bank, U.S. Bank and Fifth Third Bank. “They are payday loans, plain and simple: triple digit loans repaid on the next payday.” That’s hardly an improvement over the already popular same day loan product.

Credit unions offer quick loans the same day, but at what discount?

The NCLC study found one credit union in California – Kinecta Federal – that exploited loopholes in lending laws in order to profit as much as possible while still being able to suggest they’re one of the cheaper payday loan alternatives. Kinecta offers a 14-day loan with an APR of at least 362 percent, a rate which is comparable to some same day loan rates, but not cheaper. Other credit unions offer what amounts to expensive payday loan alternatives via a third party lender, E-AccessLoan.com.

What should payday loan alternatives do for consumers?

“Payday loan alternatives that help consumers must be repayable affordably and over time, so that hard-pressed borrowers who need short-term help can climb out of debt rather than get trapped in it,” said Saunders. Unfortunately, many of the payday loan alternatives banks and credit unions offer are not their as an offer of goodwill. They want to profit from consumers as much as the law will allow.

Sources:

ConsumerAffairs.com

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