Thursday, March 19, 2009

Pondering Payday Loans

With the focus on the economy and so many people facing budget issues, it stands to reason that the payday lending industry is going to be one that people turn to. While there has been a great deal of controversy over this at times, in my opinion, there is a simple logic to it. The reality is the ability to access a cash advance is a market that this industry fills. If it didn't? They would not exist. Those that have a less expensive option, take it.

When this was a hot topic in Ohio, I couldn't get past the fact that bouncing a ten dollar check could create more fees and net end result of a higher interest rate than a payday loan for several hundred dollars. It's easy to give people advice when it comes to money management, and there are clear horror stories out there about people who have not used the concept of a check advance the way it was intended. Or who have assumed this was free money and gone to more than one lender knowing that they had no real ability to repay it.

It's rather ironic to me that a whole industry is blamed for the few scenarios where the real blame would be more one of personal responsibility. If we truly do believe that this is a free market society, then while there does need to be certain protections in place, there should be the natural competition of the market place without bias towards or against one industry. Here in Ohio, it was the credit unions who stood to gain the most from limiting the amount of money a payday lender could charge. There was very little discussion as to what would happen to those who relied on the cash advance industry, just an assumption that by somehow trying to run these companies out of business it would magically make things better.

There have been times in the past when my family used a check advance because circumstances beyond our control made our budget go out the window. The trick is to only borrow what you know you can repay, that seems to me to be what the focus should be on. As the economy continues to impact us, I think it's a discussion that should be taking place...

7 comments:

Lawrence Moore said...

This is one of those topics I find myself flip-flopping over. On one hand, I tend to agree with you that a free market essentially determines what will exist in that market, and what will fail. On the other hand, we're seeing right now what happens when you have a free market without any sort of external controls. Unfettered greed is not pretty.

Sadly, too many people are not smart when it comes to money. I think some laws, like seatbelt laws, need to be there in order to protect people from themselves... as sad as that is.

As you know, I live here, and I too endured the endless ads promising the imminent collapse of the "industry" if limits were set on how much interest such places could charge. I laughed, correctly predicting that not one place would close if said laws were passed. Ah yes, the free market. If a business can't survive without charging 300% APR then frankly, it needs to fail.

Just one man's opinion. :)

Lisa Renee said...

Lawrence, I understand, I had mixed emotions on this issue myself until the selectivity of it started to really bother me. When I started doing research and discovered the fact that bounced check fees for much smaller amounts can create a higher net end expense and potentially have the person end up with a criminal offense? I really started looking at it differently.

We weren't going after the banks too, which if you add up the costs related to a bounced check charge equal way more than the 391% number that was touted in Ohio. That was because most of the politicians supporting it in Ohio received money from banks and credit unions.

Then the human aspect bothered me, just making the payday loan industry *disappear* didn't address the real problem, why people were facing economic crises that created the need in the first place. The whole industry was blamed when they weren't the sole cause of the problem.

Lawrence Moore said...

Lisa,

I see your point (selectivity) and I agree. I don't think the banks should be getting away with it either. I had a friend once who bounced one check for $15 or so which ended up costing him over $200 in fees because that one bounce started a "domino effect" with 4 other checks written after it. It was ugly.

Don't get me started on that, though... me and the banking industry have... er... issues. LOL!

Lisa Renee said...

Yeah, I know Lawrence, that's happened to quite a few people I know as well who ended up really in financial trouble by one small mistake. The banks and the credit unions naturally want more profit, so the easiest way for them to make that happen is to eliminate the competition. Most people pay back their payday loans within two weeks, and for them it's well worth the fee. The ones that do get caught up in a cycle need help, but really the only way to help them is to address the economy or for them to take an honest look at their budget or realistically...both.

Barga said...

payday loans are unquestionably bad for all parties involved that are not the loaners. they trap you in a cycle, and then milk you until your file chapter 14

Lisa Renee said...

They don't trap you in a cycle unless you have personally opted to borrow more than you know you can repay. We don't blame the credit card companies and try to eliminate them because people make bad purchasing decisions...

Barga said...

i try to eliminate the people who get caught...