Does the Payday Loan Industry Qualify as Predatory Lending?

Critics of payday loans frequently call the industry’s lending practices “predatory.” Since there is no universal legal definition of predatory lending, it is necessary to review what financial experts consider predatory practices. Only then will it be possible to decide whether the payday loan industry is guilty of predatory lending practices.

What Qualifies as Predatory Lending?

Many different financial experts and several states have provided their own definition of predatory lending practices.

• Investopedia limits its discussion of predatory lending primarily to the mortgage industry. However, it defines the practice as unscrupulous actions designed to entice borrowers into taking out a loan.
• Predatory lenders use fraudulent, deceptive or unfair means to convince borrowers to take a loan, according to the terminology used by Business News Daily.
• Several states have broader definitions of predatory lending. The attorney general for Arizona considers auto title loans, payday loans, mortgages, tax refund advance loans and home improvement loans to be predatory if they have disguised fees, inflated rates or excessive fees. Other states consider payday lenders guilty of usury, making them predatory.

Based on the Definition of “Predatory,” Do Payday Lenders Deserve the Label?

Although it is true that just like any other business, the payday loan industry has its share of unscrupulous lenders. However, most payday lenders are not guilty of fraud or deception. The overwhelming majority will ensure that borrowers are advised of all terms and conditions related to their loans, including the annual percentage rate, fees and repayment options, before the borrower signs a contract. That leaves only the charge of usury to be answered.

Usury is defined as charging an illegal interest rate on a loan based on the annual percentage rate. If you annualize the fees and interest on a payday loan, the APR can exceed 500 percent. However, payday loans are not meant to be rolled over repeatedly. They are intended to be a short-term loan that the borrower repays on his or her next payday. For a loan that is repaid within terms, the actual interest rate averages between 12 and 18 percent.

Should the Payday Loan Industry be Excluded from Usury Exemptions?

Each state has the right to pass usury laws that set limits on the maximum interest rate that lenders can legally charge. However, most states exempt a variety of lenders from these same usury laws. For example, the Washington State Department of Financial Institutions reports that state law provides several exceptions to its usury statutes. Retail installment debt, including store credit cards, in-house financing agreements and even bank-issued credit cards are exempt. Loans made for business or agricultural purposes are not subject to usury laws. Consumer lease and lease-purchase agreements are also exempt from the laws as are home equity loans and second mortgages.

Washington currently exempts small loans made by a licensed payday lender provided the lender complies with all requirements, such as full disclosure, compliance with confidentiality laws and restrictions regarding collection of delinquent loans. Given the many exemptions allowed for other types of loans, it would seem unfair if the state were to single out payday lenders for usurious practices.

Study Disputes Claims that Borrowers Fail to Receive or Understand Pertinent Facts

A recent study conducted by Ronald Mann of Columbia Law School disputes many of the claims leveled by critics of the payday loan industry. The study found that 60 percent of the borrowers could accurately predict the length of time they would need to pay off their loans, and only 32 percent reported that it took them longer than they had initially expected. The overwhelming majority reported that the terms of the loan had been clearly presented to them and that they fully understood those terms. In other words, borrowers were not “caught by surprise” and lenders were not deceptive.

Is it True that Payday Lenders Target Certain Groups?

Another reason often cited by critics is that payday lenders are predatory because they target the poor, seniors and/or minorities. The Pew Charitable Trusts conducted a study that undermines these claims. According to the study, most borrowers are Caucasian females between the ages of 25 and 44. Although an income of less than $40,000 per year did increase the chances of borrowing from a payday lender, other factors must also be considered. For example, the study found that 8 percent of renters earning between $40,000 and $100,000 had taken out a payday loan, compared to 6 percent of homeowners earning between $15,000 and $40,000. Overall, renters at all income levels are 57 percent more likely to use payday loans than homeowners. The study also dispelled the myth that payday lenders target senior citizens; only 2 percent of people aged 70 or above and 7 percent of those between the ages of 60 and 69 have used payday loans.

Borrowers Must Decide for Themselves Whether to Use Payday Loans

Individuals must make their own decisions as to whether a payday loan is the solution to their financial issue. Just like any other credit product, the more that borrowers know about payday loans, the greater the likelihood that they will use the product wisely. More articles about payday loans are available at