Illinois Lending Corp. says the installment loans provisions of the Illinois Payday Loan Reform Act are unconstitutional. (Photo Credit: CC BY-ND/Jamison Faught /Muskogee Politico)

Beginning March 21, Illinois consumers may not have the option to choose installment loans for their emergency short term credit needs. At least one payday lender in the state is not taking what it calls unconstitutional changes lying down, reports Crain’s Chicago Business. Illinois Lending Corp., which operates six Chicago-area payday loans outlets, has filed suit in Cook County Circuit Court, claiming that its business will be irreparably harmed if the slightly longer-termed installment loans are not allowed.

Prohibition of installment loans

Unlike payday loans, installment loans have a slightly longer term, offering consumers repayment flexibility at an additional fee. This applies at the customer’s discretion, should the standard two-week payday loan term be insufficient. According to Illinois Lending Corp., prohibiting installment loans violates the company’s constitutional rights to due process and equal protection.

As it stands, two of the more problematic parts of the new Illinois Payday Loan Reform Act for lending corporations like Illinois Lending Corp. are:

• Borrowers cannot have installment loans for more than 45 days
• A new 56-day repayment period at no additional charge for borrowers who have trouble repaying

While payday lenders are not looking to exploit borrowers who are having difficulty repaying, giving them a 56-day installment loan with no finance charge attached is untenable, says Illinois Lending Corp. The company’s 2010 business records show that it made more than 7,000 installment loans and about 700 payday loans last year.

Eliminating consumer choice

Illinois Lending Corp. is asking the court to block the provision within the Illinois Payday Loan Reform Act that would bar payday lenders and their affiliates from offering installment loans.

“There is no evidence that consumers have been injured where both (installment and payday) loan products are offered in the same place of business,” the lawsuit states.

Consumer advocates want to maintain fragile compromise

Lynda Delaforgue, co-director of Chicago-based consumer advocacy group Citizen Action/Illinois, believes that if the court grants an injunction against any portion of the Illinois Payday Loan Reform Act, the other compromises struck between the short term credit industry and the state will be torn down.

“There’s the potential for consumers to be bounced back and forth between the (consumer installment and payday) products,” Delaforgue told Crain’s.

However, by uniting the products by offering both under the same roof, payday lenders say they’re offering consumers both convenience and choice. The Illinois Payday Loan Reform Act arguably threatens consumers on both grounds. Consumers who have difficulty obtaining emergency short term credit elsewhere depend upon payday loans and installment loans, according to numerous studies.

Sources

Crain’s Chicago Business
Debt Consolidation Care Forum
Illinois Payday Loan Reform Act

Restricting credit hurts consumers and payday lenders

The Iowa Catholic Conference would be happy if payday lending disappeared. (Photo Credit: CC BY-SA/stallio/Flickr)

Bloomberg reports that payday lending is under fire in Iowa, a state where lending laws are already among the tightest in the nation. Payday loan rollovers are forbidden and fee limits are less than permissive, but consumer advocates that include members of the Iowa Catholic Conference and National Association of Social Workers are lobbying the Iowa Legislature to clamp down the rate cap on payday loans to 36 percent APR.

Iowa payday loans bill sponsored by 16 senators

Sixteen unnamed Iowa State senators have co-sponsored a measure that will be brought before the state Senate this week. The measure would limit the rate cap on payday loans to 36 percent APR. While various advocates claim this is fair, the mathematics are far from practicable. Applied to a two-week loan, a 36 percent APR amounts to $1.38 that a payday lender earns for every $100 loaned. That’s less than 10 cents per day, and it doesn’t  take into account a payday loan company’s operating costs, including employee salaries.

Personal responsibility is paramount

While it is true that some borrowers use payday loans irresponsibly, current independent payday lending research suggests that this is far from the norm. As rollovers – where a second loan is taken out to repay the first – are not allowed with Iowa payday loans, those who argue the “cycle of debt” in that state are misinformed.

What payday lending comes down to is personal responsibility on the part of Iowa consumers. While the Iowa Catholic Conference and others argue that government must protect people from themselves, nanny-state style, Republican Iowa Sen. Brad Zaun of Urbandale sees through the endless legislative loop, reports Payday Pundit.

“It’s just more government regulation,” Zaun said. “There has to be some personal responsibility.”

If a consumer only borrows what they can afford to repay and only resorts to the use of credit in essential situations, they’re exercising financial responsibility.

Sources

Bloomberg

Payday Pundit

Payday loans discussion at the 2010 Iowa Catholic Conference

Under House Bill 132, a Missouri payday lender would make less than this for every $100 loaned to a customer. (Photo Credit: CC BY/MoneyBlogNewz/Flickr)

In her campaign speeches, Missouri Rep. Mary Still claims that she supports a free market economy. However, as Payday Pundit points out, Rep. Still’s stance on Missouri House Bill 132 – yet another state piece of legislation that would place an industry-killing cap on payday loans – is inconsistent with free market competition. Rep. Still is endorsing the bill on behalf of the “young working people” in alleged danger of being fleeced by a financial bogeyman.

The dangers ‘financially unsophisticated’ Missourians face

According to Rep. Still, payday loan companies “prey on young working people” who allegedly lack the sophistication to avoid being taken to the cleaners by financial predators. Clearly, Mary Still isn’t aware of the most recent research regarding the payday loans industry – research that disproves dramatic claims that payday lenders are predatory and unregulated by bodies that protect consumers from excessive rates and dishonest business practices.

It appears what’s really bothering Rep. Still is that some Missouri residents take payday loans from out-of-state lenders. This means that Missouri isn’t getting its cut of the money. That appears to be what Rep. Still wants – a cut for the “Show Me” (the money) state.

What Missouri House Bill 132 requires

HB 132 proposes several reasonable policies that would protect Missouri payday loan customers from being taken advantage of. But in a move that would shut down payday lenders, House Bill 132 requires the following payment term, rate cap and fee schedule:

“A lender shall give a borrower a minimum of ninety days to repay a loan. A payment shall be required every two weeks so that the loan will fully amortize in ninety days… A lender may charge and receive on each loan interest at a simple annual rate not to exceed thirty-six percent… A lender may charge a loan set-up fee equal to five percent of the loan up to a maximum of twenty-five dollars.”

As Advance America Director of Public Affairs Jamie Fulmer told the Missourian, no payday lender could afford to operate under such terms and employees, landlords, insurance and more. This bill would would cost Missouri jobs.

“If you apply 36 percent APR on a two-week loan, it breaks down to $1.38 we’d charge to loan someone $100. That would break down to less than 10 cents a day,” said Fulmer.

Sources

Columbia Missourian

Missouri House Bill 132

Payday Pundit

Meet Missouri Rep. Mary Still

Caps are great on heads, but no so great for cash advance lenders. Image from Wikimedia Commons.

One of the most common regulations on the cash advance industry is to cap interest rates. It may seem like it’s a good thing to do to protect consumers from unfair interest rates. In reality, interest rate caps are an unfair standard on cash advance loans. Furthermore, rate caps constrain businesses in an industry in which almost half of all loan lenders are small business owners.

The cash advance rate cap uses bad math

Many states have introduced initiatives that cap interest rates on loans, aimed at capping the rate of a cash advance, usually at 36 percent APR. It seems like an altruistic thing to do, but there are problems with a rate of 36 percent. First, one can hardly assess the fees on a cash advance or payday loan as APR. Annualized Percentage Rates should hardly apply to a loan that matures in two weeks or less. Assume a loan lender assesses a fee of $20 per $100 loaned. If that $20 fee were compounding once a month, the APR is 240 percent. If it is assumed to compound every two weeks, that $20 fee is 480 percent annual interest. However a fee of $20 per $100 assessed in simple interest, or a ratio of the total amount paid back to the amount borrowed, it is only 20 percent interest.

Cui Bono

The phrase “cui bono”, in Latin, basically means “Who Benefits?” In the case of a short term loan rate cap, the beneficiary is banks and credit unions. Credit cards look a lot more attractive than payday loans when APR is the standard.  However, if the total a person pays back were divided by the total amount of credit used, as in simple interest, payday advance loans start to look a lot better.

Price ceilings are bad

Essentially rate caps function as price ceilings, where a business has to charge no more than a certain amount. This means that the margin for profit is drastically reduced, and the consumer cannot benefit from price competition. About 50 percent of all payday loan store owners are independent small business owners, not giant corporations. Is that who should be punished in this economy? You can read more in the Payday Loan Facts and Statistics Report on Personal Money Market.

What will the Financial Reform Bill do to payday loan companies? (Photo Credit: ThinkStock)

President Obama has signed the Financial Reform Bill, and according to a survey by AboutPaydayLoan.com, payday loan employees are worried for their jobs, writes PR Web. Many of the poll respondents assume that the subsequent creation of the Consumer Financial Protection Bureau (CFPB) will mean restrictive regulations against the cash advance and online payday loan industry, which will result in making many payday loan companies unable to function.

Payday loan employees give voice to their fear

According to one payday loan employee who responded to AboutPaydayLoan.com’s survey, the ripple effect of the Financial Reform Bill has many like him searching for higher ground before the storm. “If CFPB ends up putting a crazy cap on payday loans,” he said, “then we will be out of jobs.” The rate cap referenced is a 36 percent annual percentage rate that is rumored to be headed for brick-and-mortar and online payday loan companies nationwide. Such a low ceiling would make it all too difficult for many payday lenders who fail to diversify and operate under a less restrictive lending license. These lenders would find it impossible to meet expenses such as payday loan employee salaries, let alone turn a profit.

There’s too much cash advance regulation already

Many have argued that the combination of local and state regulations on the payday loan industry have been enough to safeguard consumers and enable businesses to continue to function. Thus, the addition of a power layer of federal regulation, courtesy of the CFPB, is considered prohibitive. As one reader who is an employee of a small payday loan company commented on a cash advance industry-related blog called the Payday Loan Blog:

“I am getting so flustered with all of this. Every day I wait on news that will shut us down or news that they will leave us alone. I feel as if many of us are on pins and needles wondering if soon we will be in the unemployment lines. Job security is gone, and a lot of the zest that I once had is fizzling out. I am not alone in this. There is uncertainty in the air. … I sure wish at least we knew what and when these changes would occur.”

Sources:

AboutPaydayLoan.com

Payday Loan Blog

PRWeb

Enjoy capitalism. Payday loan customers do. (Photo: Flickr)

Payday loan rate cap laws have circulated in various forms through the halls of state-level politics in the U.S. for years. However, not all countries that allow payday lending to serve consumers in need of easy loans are so eager to institute a rate cap that could stifle the natural price controls present within a free market economy. The Guardian newspaper reports that the UK’s Office of Fair Trading (OFT) has found that an interest rate cap on payday lending is unnecessary, claiming that a lack of competition would harm that sector of the financial marketplace.

Payday loan competition not perfect, but works ‘reasonably well’

Access to easy loans and other forms of consumer credit that fall under the general payday loan banner is important for credit-constrained consumers. The OFT recognizes that market competition has helped regulate payday loan prices. The level of competition between easy loan outlets may not be as effective as it could be, but the OFT is confident in their assessment that payday lending markets work “reasonably well.” Despite resistance from the Archbishop of Canterbury, the Financial Inclusion Centre and the debt charity coalition Debt On Our Doorstep, the OFT concluded that the payday lending market did not need a more stringent rate cap. However, the OFT did recommend further investigation into how an industry-wide “code of practice” could be instituted for the UK payday loan industry.

Finance & Lending Association agrees with OFT decision

Fiona Hoyle, Head of Consumer Finance for the Finance & Lending Association, told The Guardian that a payday loan rate cap “would have adverse unintended consequences for consumers, including for the cost and availability of credit.” If governments follow the Office of Fair Trading’s lead regarding rate caps – and take note of the Dartmouth University study in the U.S. on the effects of payday loan rate caps in Washington and Oregon State – perhaps they’ll see just how maintaining competition can aid the consumer while still allowing easy loans outlets to reasonably profit.

Simply clamping down isn’t the answer

Marie Burton, financial services specialist at the consumer group Consumer Focus – which operates independently from the payday lending industry – told The Guardian that the OFT has exposed just how hard it is to both promote competition and help drive down consumer cost. While that is the ideal, additional research into the workings of the short-term consumer finance industry in the UK may be necessary. Pulling banks and credit unions into competition by encouraging them to offer low-cost, low-hassle payday loan products would be most ideal for the free market, although banks and credit unions have failed at this before, considering America’s example.

Sources:

The Guardian

Related Video:

Payday loans are heavily regulated in the Canadian province of Manitoba. This flies in the face of reason, as 310-LOAN's executive study indicates. (Photo: picasaweb.google.com)

Governments both large and small often take it upon themselves to decide what consumers should or shouldn’t be able to do with their own money. Call this the “nanny state” mentality if you will. Regardless, it seems that a population is somewhat less than empowered if the ability to make financial choices is taken away, replaced by rules (explicit or otherwise). Through the eyes of capitalism, if consumers are not afforded self-determination, the market flounders and the people become increasingly dependent upon their government for financial protection.

The payday loans industry has taken its lumps when it comes to regulation-happy governments. Despite well-reasoned arguments that reflect the trends, tendencies and – dare I say it – general will of the people, numerous governments have managed to push through legislation that effectively kills consumer choice and destroys the payday lending industry within the affected region. In addition to the obvious unemployment that results from such careless legislation, the consumers who demanded the payday loan product are driven to less desirable (more expensive) alternatives. There’s a reason they weren’t depending upon the traditional banking system in the first place. Just because payday lending is regulated out of states and provinces doesn’t mean all of the consumers who depending upon payday loans are acceptable risks by traditional banking industry standards.

Manitoba Allows 17 Percent APR

This rate cannot sustain a payday lending business that relies upon payday loans alone for operating profits. It’s been proven many times over. Canada’s provinces (See: http://www.google.com/hostednews/canadianpress/article/ALeqM5h3DfHGfgaUgIrJMxJEAUzZ1K5CbA) have made life difficult for businesses that offer payday loans. British Columbia has a 23 percent APR rate cap, Quebec caps rates at 35 percent and Nova Scotia allows 60 percent. Compared with Nova Scotia, it seems that Manitoba payday lending lobbyists forgot to show up for the party. I jest, of course. One 2007 study by Andrew Smyth and Nathan Slee of 310-LOAN (considered to be Canada’s largest direct payday lender) makes such a clear case that one wonders if Manitoba’s government even read it. If they had read it and still voted to go with a 17 percent APR cap, you’d wonder either what axe they have to grind or who was fronting their retreat to Aruba.

“Evidence pertaining to public hearings before the Manitoba Public Utility Board to determine maximum allowable charges and fees for payday loans“

To preface the study, the authors cite a comment by Manitoba’s Minister of Finance at the time, Greg Selinger. Selinger said that “The intention is not to drive the companies out of business, because people are showing an interest in having this service, but to make sure that when they offer the service they do it in a way that’s just and reasonable.”

What is “Just and Reasonable?”

310-LOAN, according to the authors, clearly explains their fee structure to customers before any agreements are signed. They also verify that customers are actively employed as opposed to depending upon pensions or social assistance. That is a reasonable way to treat one’s payday loan customers, it would seem. Furthermore, 310-LOAN will not accept applicants who already have more than two NSF transactions in their recent banking history or more than one outstanding payday loan with another lender. They accept applicants who can reasonably repay their payday loans. Such is a protection for both the consumer and the payday loan company. Just and reasonable care is taken that neither party is exploited.

Who Uses Payday Loans?

The study authors utilize payday loan studies from Statistics Canada (StatsCan), IpsosReid, Environics, The Public Interest Advocacy Centre (PIAC) and StratCom. When available, these findings are compared against the general Manitoban population. The data for Manitoba indicates that payday loans are used by consumers who earn a slightly below average income for the province, but these consumers are far from being the “victimized poor.”

Average Age: Neither Too Young nor Too Old

According to Environics, the average Manitoba payday loans customer is 39 years old. StatsCan puts the number at 39.5, while PIAC found the average to be 42. With these and all the following results, it should be noted (and perhaps goes without saying) that the survey audiences are not identical.

Gender Split

It’s nearly a 50/50 split according to most studies. The 2006 Census for Manitoba gave a three to four percent bump up for female payday loan customers, however.

Marital Status: Most are From Married Households

The 2006 Census found that 48 percent of payday loan customers in Manitoba were married. Environics recorded 49 percent while PIAC was significantly higher at 59 percent. For single payday loan customers, the numbers were almost identical across the board: 35 percent by the Census, 35 by Environics and 31 percent according to PIAC. Only a small sample listed themselves as separated, divorced or widowed: 17 percent in the Census, 15 percent by Environics’ count and 10 percent according to PIAC.

They Will Have Residency

Partakers of payday loans in Manitoba tend to weight more heavily toward being renters, but the RBC Home Ownership Survey used for a portion of the data indicates that a majority (61 percent) do indeed own homes. In total, renters totaled 39 (RBC), 76 (Environics) and 41 percent of the respondents. Home ownership was 61 percent according to RBC, 21 percent for Environics and 59 percent for PIAC. The variations in the Environics study are curious, but not discussed by the study authors.

Household Income: Below Average, But Not Poor

Manitoba’s payday loan portrait is decidedly middle-class according to data the study authors present. Using 2001 Census data for the province, the average income for all Manitobans was $58,360. Looking at payday loan customers, PIAC found that the average income level was $51,400 and StratCom (using stats for Toronto in the Ontario province) marked it at $53,480. Environics was considerably lower at $41,376, while StratCom (using Vancouver, British Columbia data) was $42,026.

Education Level: Educated Payday Loan Customers

Using the same sources as the previous indicator, the 2001 Census found that 23 percent of Manitobans had graduated from university, 31 percent had gone to college or vocational school and 24 percent had at least a high school diploma (leaving 23 percent under that education level). StratCom (again for Vancouver) puts those numbers at 16, 28, 44 and 12 percent, respectively. StratCom Toronto clocks in at 26, 36, 34 and a miniscule three percent (more highly educated in urban Ontario, it seems). Environics’ distribution is 21, 43, 20 and 14 percent and PIAC’s is 18, 23 52 and six percent.

Employment: Payday Loan Customers Have Steady Jobs

As stated earlier, 310-LOAN requires that their customers be gainfully employed. While this standard is not exclusive in the payday lending industry as a whole, it is a dominant requirement to which most lenders adhere. Looking first at the general population of Manitoba as surveyed by Environics, we see the following breakdown, supporting the notion that payday loans in Manitoba and beyond are taken by consumers with the ability to repay:

• Employed: 62 percent
• Unemployed: Four percent (very low by today’s standards)
• Student: Six percent
• Retired: 21 percent
• Homemaker: Four percent

The total sample of payday loan customers taken by StratCom (Vancouver and Toronto) is as follows:

• Employed: 89 percent
• Unemployed: Four percent
• Student: One percent
• Retired: Four percent
• Homemaker: One percent

For Environics in Manitoba:

• Employed: 78 percent
• Unemployed: Seven percent
• Student: Two percent
• Retired: Five percent
• Homemaker: Two percent

And finally PIAC:

• Employed: 70 percent
• Unemployed: 10 percent
• Student: Eight percent
• Retired: Seven percent
• Homemaker: Five percent

Why Does Manitoba Use Payday Loans?

Emergency cash and money to cover unexpected expenses are the main reasons given in the PIAC and Environics studies, report the 310-LOAN study authors. Environics also found that consumers use payday loans to avoid bouncing a check. For Environics:

• Necessary Emergency Cash: 36 percent
• Covering Surprise Expenses: 24 percent
• To Cover a Potential Bounced Check: 21 percent
• Short-term Income Shortage: 11 percent
• For Discretionary Purchases: Four percent
• Other: Three percent

PIAC showed similar results, but notice the differences, which are not excluded to the categories PIAC respondents didn’t even cite that did rank in the Environics study:

• Necessary Emergency Cash: 31 percent
• Covering Surprise Expenses: 34 percent
• Bounced Check: Seven percent (why it’s so much lower is unclear)
• For a Major Purchase: Five percent
• Discretionary Purchases: 16 percent (why so much higher?)

When Banks Simply Won’t Do

Speed, convenience, privacy and the ability to handle emergency financial situations were all significant indicators for payday loan customers across multiple study sources. In addition, there is some evidence that suggests some dissatisfaction with traditional banking sources. See the authors’ study for specific numbers. It should also be noted that the studies referenced lean significantly toward “very satisfied” or “somewhat satisfied” for consumer approval level with payday loans and alternative financial services.

What Does a Harsh Rate Cap Do to Payday Loans in Manitoba?

310-LOAN’s study authors attempt to illustrate this is terms of where their own business is in the product life cycle. They claim payday lending is reaching the maturity stage, where saturation in society is relatively high. “In the case of payday loans, as more lenders appear, consumers are more exposed to the product and more inclined to use it,” write the authors. The saturation tends to intensify competition, leading the market toward greater self-regulation of pricing. This competition ultimately benefits the consumer, but the competition must be allowed to reach its apex if they are to fully reap the benefits. That’s the nature of a free-market economy.

Canadian Government Thinks Competition Should Already Be Maxed

Thus, they think rates should have already reached the lowest “consumer-friendly” point. Since they consider rates to be too high (a notion that the average consumer surveyed disputes), governments impose rate caps. It kills payday lenders, but does not kill demand for payday loans.

310-LOAN finds that while payday lending has grown quickly, supply is only now starting to catch up with demand. Their support for this notion is that payday loan industry advertising spending in Manitoba has begun to exceed revenue increases only in this most recent stage in payday lending’s life cycle. Earlier findings (where the supply was lower) wouldn’t need excessive advertising in order to gain customers. Demand provided fuel for growth.

Section 347 of the Criminal Code Has Delayed Saturation

Legal woes for the payday loan industry have slowed growth. This is not to say that the product is illegal; it certainly is not. But enough roadblocks were set up by the Canadian legal system to slow payday loan industry growth. In many cases, it was even a barrier to entry for potential payday lenders. This kept many potential investors away as well.

Competition and Lower Rates: the U.S. Model

The authors cite a Federal Reserve study by Donald Morgan (“Defining and Detecting Predatory Lending“) in which the connection between more payday loan stores per capita and lower rates is made quite clear. This does not mean, as the authors comment on a 60 percent APR cap that some Manitoba lawmakers had proposed before going off the deep end at 17 percent, that such a rate would be sustainable. That’s far from the truth in their estimation. In fact, it had been widely acknowledged that 60 percent is not financially viable for payday loan companies.

“Without an agreed upon method of calculating an unconscionable rate,” write the study authors, “we suggest that the board consider the costs involved in issuing short-term, small sum loans in the market today in order to effectively set the limit on the cost of borrowing.” Using a well-known Ernst & Young study, they note the profit margins for what are considered to be Canada’s “big five” banks:

• CIBC: 23.61 percent
• BMO Bank of Montreal: 27.43 percent
• RBC Royal Bank: 23.26 percent
• Scotiabank: 32.81 percent
• TD Canada Trust: 35.51 percent
  Average: 28.52 percent

Also based upon Ernst & Young findings, the authors note that the rate for issuing a $279 payday loan is $74.08. That’s 26.55 percent for the loan issued, which compares quite favorably with the average banking profit margin above. Based upon the authors’ interpretation of data on 11 payday lenders, such a rate would allow 10 of them to “remain in the market and stimulate and immediate increase in supply and investment in the payday loan industry.”

The Risks of an Excessively Low Rate Ceiling

Allow the industry to evolve in a natural free-market setting, argue the study authors. That will enhance both product and pricing according to consumer need. Set the rates too low and lenders must slash costs wherever possible and abandon efforts to meet consumer need. For instance, allowing for installment loans has proven to be popular with consumers in many locations, but the cost associated would be impossible to swallow for lenders if rates are cut to the proverbial quick. For consumers, there is anecdotal evidence that the convenience of installment loans would outweigh having the least expensive loan possible under law.

Life Dictates Debt, Not Payday Lenders

Situations like job loss, illness and family or other personal difficulties tend to have the greatest impact upon a consumer’s ability to repay short term credit such as payday loans. Yet the Manitoba government (or any government) wants the public to believe that it is the rates of supposedly predatory lenders that cause the problem. Thus, they see rate caps as the only answer. Consumers and even economists do not tend to share such views. Interest rate caps to not solve personal and societal issues; they merely restrict the free market and tend to add trouble rather than subtract it.

Payday loans in Ohio still exist, but the opposition continues to bulk up for the next battle. (Photo: Wikipedia.org)

The battle for payday loans in Ohio has been a difficult one for consumers. The recession hit the Ohio workforce harder than most, and the need for emergency short term loans is greater than ever before. Yet the state legislature in their infinite wisdom decided that what their constituents needed was nanny state regulation. Rates were capped at 28 percent APR, which effectively crippled the industry in Ohio and sent credit- and liquid asset-constrained consumers scrambling toward more expensive options. That rate is more stringent that the federal rate of 36 percent APR set for lending to active military, and we know that even at that level, the business model in unsustainable.

Payday Lending is Now

Consumers desire the flexibility to choose what is best for their financial situation. The Columbus Dispatch, rather than turning away from this point in order to blow with the political wind, recently produced an article that was pleasantly even-handed. For some, it’s true: payday loans are “the only way to get by.” ( See: http://www.dispatchpolitics.com/live/content/local_news/stories/2009/11/09/copy/More_Payday.ART_ART_11-09-09_A1_6QFK8AH.html?adsec=politics&sid=101) While no reputable lender would advocate payday loan dependency, it’s been proven not only in customer surveys but in studies conducted by the Federal Reserve and institutions of higher learning that payday loan can be an invaluable tool for smoothing out financial shocks.

Choice is Good

CheckSmart CEO Ted Saunders pointed out to the Dispatch that “There is a bank right there,” in reference to a traditional institution just a football field away from one of his stores. “They could go right there if they wanted to.”

Competition fosters choice. It also tends to help regulate prices, both of which are benefits to the consumer. But activists like Bill Faith of the Coalition on Homelessness and Housing in Ohio (COOHIO), who appears to be a firm believer in the nanny state, reminds that “People at one point also were excited about high-interest subprime mortgage loans that helped ruin the housing market.” Yet Faith makes an apples-to-oranges comparison. Wall Street shenanigans and impotent governmental policy that allowed it to go on are what destroyed the economy. Payday loans aren’t even in the same ballpark. In fact, studies like those by Dartmouth College’s Jonathan Zinman suggest that capping payday loan rates and otherwise restricting the industry harms consumers’ financial welfare.

Don’t Believe? Ask Somebody Who Has Used Payday Loans

The Dispatch interviewed Amie, a 47-year-old mother of six. Recessionary times have been tough for her budget, and her low earnings make getting ahead almost impossible. Even though she’s found herself jumping from one payday loan to another, she said “I can’t complain. At least they’re helping me,” referring to CheckSmart in Ohio.

That’s ammunition that payday loan critics would use to say that companies like CheckSmart are pulling Amie into an endless cycle of debt. But what we truly have here is a financial landscape where banks, credit unions and even employers have for the most part failed to serve the populace. Requirements to apply for consumer loans through old-school channels often exclude those who need the most help. As wages have not kept pace with the rise of inflation, too many consumers like Amie find themselves in a large hole.

Legislation: Like an Ant Lion’s Hole

Legislators who fight for 28 percent APR and other such unreasonable restrictions upon businesses without the deep pockets of the financial mainstream are creating a nanny state scenario where consumers with nowhere else to turn will have to depend upon the “alms” of the government and their banking tentacles. Freedom of choice sinks beneath the waves. Or, if the government does not assert total control and credit-restricted consumers are left to fend for themselves, regulating payday loan companies out of the market most frequently leaves consumers with even more expensive options, from loan sharks to overdraft fees. At least payday lenders make their costs clear up front. That’s something a bank never does with overdraft fees. If you’re skirting the red, using an ATM card becomes a deadly game, as every infraction can incur a fee of $25 or more, even if you overdraw your account by as little as one penny. But that’s OK, says banks. It’s all in the micro-fine print!

“Banks and other lending institutions aren’t doing their jobs,” says Koziura

That’s what House Financial Institutions Committee chair Rep. Joseph F. Koziura of Lorain, Ohio told the Dispatch. “The system is built on making money on fees now instead of the old-fashioned loaning money and putting money in the system. That’s 90 percent of the reason we’re screwed up.”

What happened when half of Ohio’s 1,600 payday lending outlets closed down after approval of a 28 percent APR rate cap? Lots of people hopped into the unemployment line, for one. Consumers kowtowed to the voice of government and made life more difficult for those who can ill afford such windmill chasing. There were certainly some payday lenders who were unscrupulous in their dealings with customers, but it was not a majority. Payday lending is a regulated industry with a keen eye toward consumer relations. Groups like the Community Financial Services Association and the Online Lenders Alliance are there to ensure that consumers can safely enjoy the use of payday loans.

But Payday Lenders Aren’t Being Allowed to Run Legitimate Business

Charging $15 per $100 loaned is common for a payday loan. For a two-week loan, paying 15 percent interest is reasonable for an emergency service that can expose the lender to a great deal of financial risk. But Ohio legislators managed to convince consumers (lead the lemmings?) into laws that prevent payday lenders from even doing that. According to the Dispatch, CheckSmart charges up to that rate, but it’s broken down into numerous fees in order to circumvent faulty legislation. It gets around the 28 percent APR rate cap as it currently exists. And CheckSmart makes each of the individual fees clear to its customers, who continue to use their services. The truth is what consumers want, not horror stories that leave you thinking, “Yeah, that really doesn’t happen to most people.” No hook hands scraping the door at midnight, no dolls that move on their own and no payday loan debt traps… that’s story time, kids.

Legislators Still Aren’t Satisfied

Ohio legislators are continuing to drive for a 28 percent APR rate cap that applies to any payday loan and closes the loopholes. “The latest bill up for debate in a House committee,” writes the Dispatch, “would cap interest at 28 percent for all loans of up to $1,000 made for a term of three months or less.” That would kill payday lending in Ohio. A vote is set for early December.

Payday Lending: A Tool to Be Used with Healthy Caution

Payday lending is not a magic ATM. It isn’t money to fulfill your wildest cash desires at a moment’s notice. Such unbridled use can easily lead to dependency, when what a consumer’s finances need is sound budgeting. But regulating payday lending out of business in Ohio because a minority of consumers use the payday loan product in ways it was not intended to be used is no answer. If people fear the nanny state when it comes to bailouts and healthcare, shouldn’t they also fear it in this avenue of consumer finance?

Speaking of government, there’s an invention called Social Security. While it has been a cash lifeline for some, many others worry that it may be a financial scam, a Ponzi scheme that is costing the modern workforce millions each year. Yet legislators make no earnest attempt to reform that system. They consider payday loans a more desirable target, perhaps? There might just be more of a campaign war chest in that field, thanks to the banking industry. Vote as the dollars go; isn’t that the way?

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