Where Are the Payday Loan Alternatives?

An epic battle is being waged between the payday loan industry on the one hand and consumer advocate groups on the other. The payday lenders argue that they provide an important service that helps people who experience short term financial setbacks. The consumer groups counter that the lenders are gouging consumers with fees that translate into interest rates that can exceed 1,000% on an annual basis. Payday lenders retort that short term loans are expensive to process and manage, and that charging lower fees is not economically feasible. Add to this the debate of chronic, repeat borrowers, and the battle between these two groups just escalates.

For the most part, this debate is played out in state government. Consumer groups are working hard to convince state legislatures to cap the interest rates that payday lenders can charge. Typical caps that have been put into place in some states range from 28% go 36%. Once a state imposes these caps, payday lenders close shop and leave the state, explaining that their business is just not economically viable under these terms.

The question all this raises is twofold. First, where do consumers turn for short term cash needs in states where the payday lenders have been run out of town? And second, why don't consumer advocate groups focus their resources on developing a lower cost payday loan alternative, rather than with more laws and regulations. It is this second question that is the focus of this article.

If payday lenders are grossly over-charging, a lower cost alternative should be able to enter the market. Indeed, at least one option has, although on a limited scale. Called a Salary Advance Loan Program, some credit unions have marketed a low cost short term loan as an alternative to traditional payday loans. Unfortunately, the availability of these programs is very limited, and several credit unions that initiated the alternative have since shut down the program.

And this brings us back to the consumer advocate groups. Direct your resources at a lower cost alternative, and you will either put the payday lenders out of business, or force them to lower their prices. If a lower cost alternative is not available, then perhaps you need to redirect your efforts to consumer education.

And here's why this issue is so important. One can imagine the consumer advocates and legislators congratulating themselves after a legislative victory that effectively puts payday lenders out of business in a particular state. Perhaps they celebrate at a nice restaurant before returning to their comfortable homes in the suburbs. While they enjoy the sweet smell of success, the consumers they seek to protect are left trying to figure out how to get to the next payday. There is something wrong with this picture.

The payday loan industry has a bad reputation, and for good reason. They promote and encourage chronic borrowing because it is profitable. But consumer advocate groups' legislative efforts are not helping. Instead, they should create alternative solutions that actually help consumers, not more laws that leave consumers with one less option.