While Payday Loans Are a Poor Option, Forbidding Them is Far, Far Worse
In recent years, politicians, consumer agencies and even celebrities have become increasingly critical of payday lenders. Terms such as “debt trap,” “predatory lending practices,” “advance payday loan,” and “usurious rates” are becoming extremely common in comments made by these critics. Opponents of payday loans would regulate the industry so severely that many lenders would stop offering short-term, low-dollar loans. Payday loans may be a poor option, but for the millions of Americans who rely on them, the consequences of not having access to an advance payday loan would be worse.
If Payday Loans are Unavailable, the Options Chosen may be Worse
Critics of payday loans often suggest options that may not be available to many borrowers who patronize payday lenders. According to an article in The Atlantic, the average credit score of borrowers at payday lenders is 520, meaning that they would have a difficult time attaining approval from traditional credit sources. If payday lenders close their doors, people who rely on an advance payday loan to meet financial emergencies would have to find some other means of raising the cash they need. Since many of them could not qualify for a loan from a bank or finance company, they might turn to title loans, write checks knowing that funds are not in the bank or borrow from a loan shark. All of these options can have consequences that are even more costly than a payday loan would have been.
Title Loans are Worse than Payday Loans
The Pew Charitable Trusts conducted a study on title loans in 2015. Although title loans are not available in every state, the study found that approximately 1 percent of the nation’s adults take out a title loan every year. Title loans are secured loans that require borrowers to pledge their vehicle as collateral. If they default on the loan, the lender can repossess the vehicle. The study found that 6 to 11 percent of the borrowers have their cars repossessed when they are unable to repay the loan. Approximately 33 percent of all title loan borrowers are pledging the only working vehicle in the household. Should the family’s only vehicle be repossessed, borrowers could be unable to commute to work, which could result in loss of pay or even loss of the job.
Bank Overdrafts are More Costly than Payday Loans
GOBankingRates.com published an article on the results of a study conducted by the Consumer Financial Protection Bureau, which is the same agency that is working to regulate the payday loan industry. The study found that the average transaction that results in an overdraft fee is $24, but the average bank fee is approximately $30. Lower-income customers are more likely to incur overdraft charges, according to the study. One overdraft fee can quickly start a chain reaction if the fee results in additional checks being returned for insufficient funds.
When study participants were asked why their accounts incurred an overdraft, 23 percent responded that they had to make a necessary purchase even though they knew funds were not available. In other words, they needed to buy food, medicine, gas for their cars or another essential item. Since the study found that most overdrafts are cleared within three days, the annualized percentage rate for an overdraft fee comes to approximately 17,000 percent, which is significantly greater than the APR for pay loans.
Borrowing from a Loan Shark is Costly and Potentially Dangerous
Kelly D. Edmiston, a senior economist at the Federal Reserve Bank of Kansas City, wrote an article exploring whether restricting payday lending could hurt consumers. Edmiston’s research found that nearly half of those borrowing from a payday lender did not have a credit card. Furthermore, 50 percent of the borrowers stated that a payday loan was the only option available to them. Since so many borrowers lack access to other means of obtaining the cash that they need, Edmiston discussed the possibility that desperate people might resort to borrowing from loan sharks. Edmiston cites the American Bar Association as stating that loan sharks charge interest rates of up to 20 percent per week, and payments may be enforced through threats of violence.
Payday Lending is a Complicated Issue
The issues surrounding payday loans are not as simple as many critics state. Eliminating the advance payday loan would have the potential to hurt the very people that opponents of the industry are attempting to protect. No one can argue that a payday loan is an ideal solution for a financial crisis, but for many borrowers, it is the only solution. However, borrowers should use any type of credit wisely, and this includes payday loans. Borrowers who educate themselves on the particular type of credit they are considering are less likely to make a poor decision. Those who are interested in learning more about payday loans can find additional information at PersonalMoneyStore.com.