Should Changes Be Made to the Way the Payday Loan Industry Is Regulated?

Payday loans are hardly new, but the controversy surrounding them has reached a fever pitch of late. Proponents insist that these short-term loans provide a much-needed service by giving people access to small amounts of cash when they’re in a pinch. Opponents, however, believe that payday loans merely target low-income individuals who have no other options, causing them to fall deeper into debt. Like most things, however, the issue is far from black and white.

Despite Detractors, Short-term Loans Continue to Be Immensely Popular

Although they have their detractors, short-term loans are widely used. A recent report, for instance, revealed that more than 46,000 fast cash loans are issued per week in Alabama alone. Their popularity is understandable given most banks’ lending policies, which typically forbid small loans and require good to excellent credit. A significant portion of the U.S. population lives paycheck to paycheck. Traditional loans are typically beyond their reach. It makes sense that this underserved population turns to fast cash loans via lenders like in droves.

Do Payday Loans Cause People to Fall Into Long-term Cycles of Debt?

Those who oppose them insist that short-term loans cause people to fall into cycles of debt from which they often struggle to recover. Typical reasons include the low incomes of those who seek them, the high interest rates attached to the loans, the considerable fees that are tacked on when repayments are late and even higher interest charges incurred when loans are rolled over into newer, larger ones. Here’s the question: Are all short-term loan customers using them this way?

What Kinds of Solutions Have Been Proposed to Address Such Issues?

Those who insist that loans from payday lenders are a detriment have long called for enhanced regulations. As evidenced by recent comments made by industry big shots, however, finding a solution is anything but easy. For example, the Consumer Financial Protection Board recently proposed requiring payday lenders to perform more due diligence regarding consumers’ ability to repay such loans. Those who seek them typically have poor credit histories, however, so this solution would leave many with nowhere to turn. The bureau also recommends capping interest rates and placing restrictions on rollover loans.

Meanwhile, an essay by the New York Federal Reserve Liberty Street Blog recently suggested that the idea that people are somehow tricked into taking out cash loans is patently untrue. While many contend that payday lenders engage in predatory lending practices, it’s arguable that consumers are aware of the risks and choose to take them anyway, which suggests that adding more regulations won’t accomplish a great deal.

What Are the Best Reasons for Someone to Take out a Payday Loan?

Despite all the contentiousness surrounding short-term loans, they do provide a valuable service for certain segments of the population. If federal regulations are enacted, people who legitimately rely on these cash infusions may be left with no options besides pawn shops and installment loans, which are arguably inferior options. The idea that short-term loans do more harm seems incorrect when one considers the many legitimate ways in which people use them, including:

• To Keep Utilities from Being Disconnected – Oftentimes, the fees associated with the typical short-term loan are far lower than those associated with having utilities shut off. Utility companies charge exorbitant fees to have electricity and gas turned back on, so taking out an fast cash loan in this instance makes sense.

• To Avoid Overdraft Fees – Bouncing a check is almost always pricier than taking out a short-term loan – especially if multiple transactions go through when the account is overdrawn, possibly resulting in dozens of fees.

• To Avoid Escalating Fines and Penalties – When tickets or court fees need to be paid, taking out a short-term loan is cheaper than being hit with additional fines and costs or potentially losing a driver’s license or other privileges.

What Kinds of Changes Are Expected to Happen in the Payday Loan Industry?

A lot is still up in the air regarding the fate of the payday loan industry. Chances are that some sort of action will occur within the next few years. Based on the current statistics, it’s probable that the government will maintain that these loans provide a valuable service to certain segments of the population and will act accordingly.