Payday Loans Under Attack

Where might a consumer go for a loan if he or she could not obtain credit from a bank, finance company, credit union, pawnshop or friends and relatives? The only alternative for a needy consumer might be a payday loan. What are payday loans? A recent Federal Trade Commission's Research Alert explains the process. A consumer writes a personal check payable to the lender for the amount that he or she wishes to borrow, plus a fee. The payday lender gives the borrower the amount on the check minus the fee. For example, assume that a consumer needing $100 writes a check for $115, post-dated for two weeks. When the lender deposits the check in two weeks, he receives $15 in interest for a two-week loan of $100 loan. That works out to an annual rate of about 390 percent. If you need cash (and are desperate), type in "payday loans" on your computer's search engine. You will find many offers.

There are arguments both for and against payday loans. Payday loans have not escaped the attention of editorial writers and state legislators. An editorial in the Montgomery Advertise is an example. Payday lending "is an industry that preys on the poor by charging unconscionably high interest rates for short-term loans... But instead of prohibiting such blatant usury, the Alabama House of Representatives last week adopted a bill that essentially gives its approval of charging poor people interest rates of 400 percent or more on an annual percentage basis." At about the same time, legislators in Georgia passed a bill that would outlaw all payday loans.

In sharp contrast, Daniel J. Popeo of the Washington Legal Foundation argues in an op/ed column: "Consider for instance, the campaign currently being waged against payday lending. Payday lenders provide short-term credit that allows consumers faced with unexpected expenses to obtain an advance on their next paycheck for a fee. Traditional banks exited the small denomination loan many years ago, and thus are no longer offering an option for working families with these needs ... The payday industry's rapid growth is clear evidence that consumers both want and utilize this service." The industry is also quick to point out that the typical fee charged on a two week payday loan is less than the bounced check fee that a cash-strapped consumer would otherwise have to pay, on average, as a consequence of writing checks to cover necessary expenses.

Both the Federal Deposit Insurance Corporation and various state legislatures have been drafting legislation and regulations affecting payday loans. The FDIC has suggested that state-chartered banks should restrict their payday loan programs so that consumers would not take on loans that they cannot repay. Also banks should restrict the number of payday loans to each customer within a given time period. Payday loan "rollovers" (i.e., repeated refinancing of the same loan, with multiple fees) are recognized by both policymakers and the industry as genuine problems that warrant either industry self-imposed limits or regulatory action.