Payday loans are perhaps one of the most villainized loans in the state of Texas. Proponents would say that they give credit access to those who would otherwise not be able to obtain a loan. Opponents say that they prey on the poor and place unrealistic financial burdens on them. So which is it? Are these loans blessings or curses. Let’s look at a couple of hypothetical situations.
Person A needs money to pay for an emergency root canal. They are in great pain but will not have money to pay for the emergency procedure until they get paid again. They get paid again in a week and know for sure that they can repay the loan. There is nobody for them to turn to to pay for the procedure so what should they do? Should they buck up and stick it out a week or borrow money with a payday loan. If you have ever dealt with tooth pain, you will know that the pain can be compared to that experienced in child birth. Bucking up is not an option here. In this case, a payday loan or cash advance could be a very good thing. Without it, person A would be in pain for a week and probably would be unable to get much accomplished at work. This puts both their job and health at risk. They take out a loan for $300 to $400, get the procedure and pay it back on their next payday, with fees of course.
Was this a good deal? I think it would be hard to argue the value of this loan in this case. The borrower was able to get the procedure that they needed, get out of pain and the fees were worth every penny. I would ask opponents of payday loans, what else could this person have done besides suffer.
Person B is short on money for rent. They take out a payday loan so that they can meet their immediate financial obligations. Without a payday loan, they risk losing their home or perhaps will have to choose between paying other bills such as electricity or water. They take out a loan which they intend to pay back at their next pay period. All is good for a week but the problem is that the loan does not address the true problem. Person B does not make enough money to meet their financial obligations. The loan is not being taken out to pay for an emergency expense but for a regular expense. At the end of the week, they pay back the loan with probably 30 to 40 percent of their regular paycheck. At this point they are in an even worse financial situation. They will once again find themselves unable to meet their regular financial obligations. So, in order to pay their bills, they must now take out another payday loan, perhaps a bigger one. This is how people become trapped in payday loan cycles.
Was this a good deal? In this case, it would be hard to argue that this was a good deal for the borrower. A payday loan, in this case, only lead to a worse problem in the future. It only delayed the inevitable. The borrower should have instead been forced to face their financial reality without involving a lender in the situation, complicating matters further.
Blessing & A Curse
You see, payday loans or cash advances can be both a blessing and a curse. There are situations where a borrower has no other alternatives but will have the ability to pay the loan back. There are also situations where a loan will only delay or even worsen the inevitable financial crash. The real question is who should be in charge of making this decision, the consumer or the lender.
It should ultimately fall upon the lender to decide if the loan can be repaid. Consumers are people and they will generally take the short term gratification of money and not think about the ultimate outcome.
This is, of course, where legislation must come into play. Without legislation, lenders will never take the action of vetting their loans. Because of the high interest rates and fees, they will simply play the odds understanding that overall, they will take in far more money than they lend out
The problem with most legislation however is that most of the time it seeks to limit the fees and interest charged by the lenders. Do this and you will not protect the consumers. Instead, you will take away a source of credit. Without the high fees, the lenders will simply seek another market for their capital. Why lend money to high risk borrowers when there is no financial benefit. The risks become too high and the rewards too low.
Instead, most legislation should be aimed at requiring lenders to scrutinize their loans. Can the loan be paid back without placing undue financial stress on the borrower? If so, then the lender should be able to make high interest loans to consumers, providing of course that all fees and costs are clearly stated. If not, then lenders need to be required to turn down applicants, even if they probably would have still made some money on the loan.
Lenders will be quick to argue that placing additional requirements on them will slow down the funding of the loans. Loans which they say are meant to be dealt out quickly for emergencies. In some cases this may be true but it is the only way to protect consumers from the negative aspects of payday lending while still allowing them the benefit of easy, although expensive, short term loans. Lenders must also be made to understand that it may be the only way to save their industry.