Payday Loans and Responsible Lending

Payday loan establishments have been under lots of fire recently. With interest rates as high as 480 percent, this isn't really too surprising. In fact, opponents of such establishments have been so strong in their views that many states have had voters enact potential bans on such institutions. In Arizona and Georgia and ten other states, such practices are either illegal or much targeted for serious censure. The military, in fact, does not permit enlisted to visit such establishments and payday loan institutions are now required to ask if a potential borrower is a member of or dependent of an active military member. In light of all this negative attention, payday loan establishments are working hard to counter the bad press and encourage more responsible borrowing.

Whether the move is one of self-regulation or to improve recent negative press, payday loan places are going out of their way to caution borrowers about making better choices. Voters in Arizona in 2008, for example, were asked to consider a ballot proposal that would essential ban payday loans in Arizona. In a strongly worded response as to the design behind the proposed legislation, Representative Marian McClure of the city of Tucson was quoted as saying, "This is not much different from our laws governing drug usage,'' McClure said. "If it ruins lives, I believe that we do have a responsibility to give the people a fighting chance." Many states, not just Arizona, were sending message to the establishments that, if they will not regulate themselves better, the states would do so far more aggressively. The initiative passed in Arizona and many are now bracing themselves for a slow but sure phasing out of the industry, unless the industry itself does some more self regulation.

Similarly, national attention is on House Bill 1214 which enacts, potentially, caps on percentages payday loan establishments can charge. At first blush, this sounds like promising legislation. The bill could establish a "loan cap of fifteen cents per dollar loaned in H.R. 1214 authorizes lenders to charge $60 for a typical $400 loan, which is due in one pay cycle" (HR 1214, 2009). While this sounds reasonable, it "authorizes lenders to collect $540 in finance charges for a $400 loan taken out over an 18-week period" potentially increasing current amounts.

The truth is that these establishments are all very upfront about the costs to the consumers and take great steps to advertise that payday loan places are not for people with long-term or serious financial trouble. Most post financial counseling information prominently in their stores and on their websites and several go so far as to offer financial and budgeting advice. In an interesting contrast, banks regularly charge fees, up their rates, and play money games with their customers' money and, yet, we don't see the news outraged over banks and their practices.

The truth is that payday loans are an expensive alternative to proper budgeting, but they do provide an alternative. It is up to the consumer to decide if the alternative is a viable option.