Consumer Protection vs. Governmental Control – Developments in the Payday Loans Industry

If someone were to stop random people on the street and ask how they feel about payday loans and installment loans, they’d likely hear a mix of appreciation, confusion and trepidation. Consumers who have gone through difficult times in their life have likely used these online payday loans bad credit to make it through financial struggles, and many of them remain grateful to the lenders willing to extend those loans.

The confusion and wariness that some consumers feel about payday lending often comes from news reports that focus on the high interest rates commonly associated with the short-term lending industry. To the wealthy consumer or someone without direct payday lending experience, it’s jarring to hear of lending and interest rates that can go over 300 percent APR, especially when you’re considering your next payday advance.

In response to that alarm, many state lawmakers are amid heated debates over options to control the industry providing small loans to consumers on a short-term basis. Those in favor of banning or restricting payday and installment loans often state that this is the only way to protect consumers, but many others argue that the laws will strip consumers of their rights rather than empowering them to make their own educated financial decisions.

Payday Loans Often Provide a Lifeline to Cash-strapped Consumers

If online payday loans bad credit are by and large a bad deal, one has to wonder why so many consumers take advantage of them each year. In many cases, these individuals need money to keep the electricity on in their homes, feed their children or stop repossession on their vehicles. In such challenging situations, they often have the choice to overdraft their bank account, acquire late fees, write a bad check or go to their local short-term lender for an installment loan.

The Indiana Department of Financial Institutions has recognized that “A $15 per $100 payday loan fee might look like a bargain compared to a bank’s $25 bounced check charge plus a merchant’s fee in addition.” This is exactly what many consumers consider when they are in immediate need of financial support. A payday loan is considered an advance on their upcoming paycheck, and they willingly pay the associated fees because it’s the cheapest way to obtain the money that they need in that moment.

Indiana’s Department of Financial Institutions also points out that even credit cards with high interest rates offer much lower annual rates than most payday lenders. While that’s true, credit cards encourage ongoing debt while payday and installment loans are financial resources that consumers can use on an as-needed basis.

Consumers can only consider the options that are available to them at the time of need, and lenders like are readily available to those unable or unwilling to secure loans through a bank. While a credit card may offer lower interest rates, not all consumers can secure credit cards. Even more important, not all consumers want to carry long-term debt on a card; they’d rather put themselves in a position to eliminate their debt quickly.

A Review of Proposed Restrictions for Short-term Lenders

Many states are now passing or considering bills that may bring the following restrictions to the payday lending industry:


  • Bans on loan rollovers


  • Mandatory waiting periods between loans


  • Restrictions on extending simultaneous loans


  • Mandatory extended payment plans


  • Income-based borrowing caps


  • Interest rate caps

According to The Consumerist, many of these proposed “protections” may harm consumers in need of short-term loans. Consumers will no longer get to choose how much money they want to borrow, how many loans they want to secure or whether it’s in their best interest to roll an old loan into a new loan. If the government tells them how much they can afford to borrow based on their income, the regulations could prevent some people from securing the funds that they may need in critical situations.

The Solution Is a Combination of Education and Free Choice for Consumers

If consumers choose to use payday lenders like Personal Money Store and deem the associated fees acceptable for their current circumstances, they may not appreciate government restrictions that limit their access to a resource that they consider valuable.

The Community Financial Services Association of America has established best practices that all members of their organization must implement. These best practices include the requirement to “encourage consumer responsibility.” For more about the short-term lending industry, the Personal Money Store finance blog has plenty more information.