Nothing good can come from a payday loan.
According to new research from Pew, the average payday loan borrower must pay back $400 within two weeks, but can only afford a $50 payment. What comes next? A never-ending cycle of debt and $500 in average additional fees over five months.
Only 14% of borrowers can afford to repay the loans with their monthly budget.
Why do People Use Payday Loans?
Since they are so clearly bad for the borrower, why would anyone use payday loans?
Sadly, those who take out payday loans commonly fall in to one of the following buckets:
- they are in debt and are in their darkest/most desperate hour (i.e. debt, drugs, danger)
- they have been tricked or don’t understand misleading statements/marketing and didn’t realize how awful of a deal they signed up for
On #2, many payday lenders reel in customers with misleading statements like, “the cost of borrowing for loans is only $20 per $100 borrowed!”.
What they don’t tell you (until you read the fine print) is that $20 fee is charged EVERY 2 WEEKS. The APR’s are often 500%+, and the typical payday loan APR is around 400%, meaning that for every dollar you borrow, you are paying back more than $4 per year.
Who would willingly sign up for that offer if they were in a good frame of mind or not deceived?
This is why I’ve banned any advertiser who has identified themselves as a payday lender to advertise on this site (along with gambling, get rich quick, and other unsavory business models). I think it’s a predatory business model.
Should Payday Loans be Banned?
All of this begs the question: “should there even be payday lending, when little (if any) good comes from it? Or should we just ban the practice entirely?”.
Payday lending is a big business ($7.4 billion per year). It has a strong lobby, that has helped keep it around, and that lobby argues that “Short-term credit products are an important financial tool for individuals who need funds to pay for an unexpected expense or manage a shortfall between paychecks”.
They are right about payday loans being “a tool” that can be used in emergency situations. But that’s kind of like saying, “a chainsaw is a tool that can be used to cut bread.” Sure, it’s “a tool”, but there are usually better tools out there. For those in need of payday loan money, it could come in the form of increased cash flow from:
- cutting expenses
- increasing income
- selling stuff you no longer need
- getting food from a shelter
- asking whatever business you owe money to to put you on a long-term payment plan
- debt consolidation
- debt negotiation
- rehabbing drug addiction
- borrowing money from family and pay them back with modest interest
- donating marrow
Heck, even street panhandling is better.
Does payday lending make our country better? Or is it helping an underwhelming few while hurting the large majority as it drives them more in debt?
As taxpayers, we all end up covering the bill for those who have have fallen on hard times and are reliant on government subsistence.
Already, in 13 states, payday lending is either entirely illegal or not profitable (due to interest rate caps and the type of high risk borrowers attracted to payday loans) to be a payday lender.
Should payday lending be banned nation-wide?
Is there a moral imperative to protect those who are the most vulnerable from predatory business practices? What’s your take?
No. The government needs to start educating and stop babysitting. Banning things can have too many unintended consequences, and is really just the wrong way to go about living. Something hurting you? Ban it. Something annoying you? Ban it. Something just not seem right? Ban it. People are too reliant on the government to protect them from bad things, and they’re way too willing to give up their freedom so they don’t have to think that hard. Rather than all of this regulation and banning, let’s start requiring high school students to pass financial literacy classes before they’re allowed to graduate. Instead of more rules (that no one, including regulators, seems to understand), we have more people able to make smart decisions. Eventually we’re going to end up with so many rules that we’ll just ban lending in general. That would help a lot of people stay out of debt, but is it really the answer?
I mostly agree Carla – but my view is that in reality, most people won’t change. Even with the extra awareness, education, and view of the short or long distance consequences – people stay the same and want the same things whether they can afford them or not. I just think all of these “freedoms” end up costing us bigger in the long run (ex: people making poor health/diet choices costs us as a nation, paying for their hospital bills; people getting mortgages and car loans that they can’t afford causes foreclosure or loan delinquency which contributes to a poor economy and affects us all.)
I don’t have a good answer – obviously, BIG government dictating what we all can or can’t do isn’t the answer, but on the other hand, some people just aren’t responsible enough to have all of that freedom and choice which ends up getting shouldered by tax payers down the road at an increased cost. It’s a predicament for sure!
I used a payday lender once. It was the result of some poor planning (which I’m not proud of); when some charges were applied to my account, plus a couple automatic payments that I had completely forgotten about, and the end result was going to be 6 overdraft fees at almost $40 a pop. So, I got the loan to cover the $400 (or whatever it was) – put it in the account to prevent the $240 in overdraft fees – and paid the loan back a few days later at $420 or so, with a processing fee and minimal interest. The $20 saved me from the $240 in extra fees – not a practice I would advise anyone to get into regularly, and I consider myself fortunate to have squeaked through it without a bigger financial scar. That was a few years ago – and now with better planning and budgeting, it thankfully hasn’t occurred again.
I do agree with you that they are a predatory style of business, and prey on the people that generally don’t know any better, or even if they do, have no choice. Much like companies that give high interest car loans. Those folks are upside down in their loan from the second they drive off the car lot.
In an ideal world, banning payday loans would get people to rethink their financial decisions and magically, everyone would become fiscally responsible. From a moral perspective, I think they should be banned because these institutions prey on the vulnerable. It really irked me to see a commercial the other day with Montel Williams touting short term loans. As a realist, I don’t think banning payday loans would make difference as long as people continue to confuse their wants and needs and seek instant gratification. I believe it’s individual behaviors and thinking that needs to change. Payday loans are merely conduits for people’s poor choices. At worst, we could see black market lenders crop up if the brick and mortar fronts disappear.
I like the idea of banning institutions that prey on the vulnerable – can we also ban for-profit colleges that suck up federal student financial aid dollars and leave students with no practical experience and a worthless degree?
Banning institutions that prey on the vulnerable? Sweet, let’s ban the government! That’s all they do is prey on the vulnerable.
Definitely another vampire squid stuffing its’ blood funnel into the pockets of the poor.
There should be a way for people who need a micro/emergency loan to get one without being screwed. A big aspect of this is that people think it’s only the poor that need a service like that but I know that if I didn’t have a family to borrow a few hundred occasionally I would consider looking.
I suppose one way would be to incentivize banks to provide services for lower income people. Maybe have an allowance of 1 per year and then make it progressively more expensive each time to discourage repeated use. Also, throughout that process bank associates could begin introducing users to financial management principals to increase cash flow as G.E. mentioned.
Should they be banned? No, I guess not–you can only legislate against stupidity so much, and then there’s that whole “free market” argument that companies love to exploit.
It’s the same issue I have with for profit schools that charge a fortune and put students in debt when the quality of the classes is very sub-par. There are things that can be done though–tougher regulations on payday loan providers, caps on fees/rates, or in my example, you don’t allow for-profit schools to get federal aid money.
Also, one target of the payday loans is military personnel who, because of the frequency of their paychecks, resort to pay day loans to fill the gap. In instances like that, I think the government, along with the other services it provides to service members, should offer similar nonprofit loan services.
Unfortunately, we can’t count on companies to do the right thing these days. They constantly push the boundaries to see what they can get away with. They’ll exploit the poor and more vulnerable who often don’t have a strong enough voice to fight back. I get that many don’t like dreaded regulations, but they’re necessary to protect us from these situations.
I’ve been reading a book about a Chicago mobster in the 1980s, and back before these things were legal and common, the mob basically ran the exact same kind of scam, except it could get you killed instead of just financially ruining your life. It was a HUGE business for them. Long story short, as with a lot of things, legalize it and regulate it.
Until I saw it in the book, I thought they should make it illegal because it’s morally disgusting, but now I see the unintended consequences that would come about if we just banned it outright. Maybe it needs more regulation though.
(The book is Operation Family Secrets by Frank Calabrese, Jr., for those who are interested. It’s pretty good so far!)
Yeah, but that’s a slippery slope. Should we make the meth/crack/heroin trade legal as well to eliminate drug cartels/mafia drug selling murder? Less murders, but plenty of lives would be ruined in other ways.
Hey, as long as it provides tax revenue, why not?
I see where you’re going with that, but slippery slope is a logical fallacy for a reason. People don’t die from payday loan overdoses.
Indeed. Slippery slope IS a logical fallacy.
Don’t they have to legally post the APR? Or can they get around it by wording the payback terms in confusing language. It seems like at the very least requiring them to post APR terms clearly on the documents and advertisements would solve a lot of these issues.
Also are there any community service organizations that teach personal finance? It’s not really covered in schools beyond balancing a checkbook. I would definitely be interested in donating money / time to a cause like that.
The Military Lending Act has effectively banned payday loans to servicemen because soldiers were losing their security clearances due to bad credit ratings. So Congress agrees it’s bad for national security, but they keep it legal for everyone else because it’s good for their reelection campaign funds?
People aren’t allowed to sell Meth, and by the same logic they shouldn’t be allowed to make payday loans.
Personally, I think payday loans are an atrocity, they are abusive and do nothing to help people along with their interest rates. I’m not for banning them as I also believe in minimal government interference in how business should be run. There really should be alternatives provided to people that are struggling. Lending them money at reasonable interest rates with a direct withdrawal from their paycheck might be a solution. But it would have to be coupled with financial counseling to help them stop what they were doing which got them there in the first place. Relying on payday loans is worse than living from paycheck to paycheck. In my opinion it’s the last step from financial catastrophe.
Yes. I think payday loans should be banned nation-wide. These are horrible loans. The interest rate and fees are ridiculously high. I found myself in a financial situation and considered getting a payday loan. After I did my research and found out the interest was 500%, I said forget it! It is not worth it. I would’ve ended up paying back $2,000 on a $400 loan. So instead I sold some purses, cashed out my savings account, and was just late paying other bills. Since then I’ve re-established my savings account, bring my lunch to work, and used my IRS refund to catch up on late bills. I feel sorry people who take out these loans. I agree it would be better to panhandle.
Banning them will, as pointed out above, not solve the problem. Restricting their fees, rates and interest will be far more effective. It will keep those who are looking for predatory income levels to go elsewhere.
Like pawn shops. That is still the “old school” way for people with poor financial skills. I am just amazed at what these people get away with. And that they have customers.
In a business I owned earlier in my life we had several young guys work for us, where I saw up close the kinds of things they do and the jams that result, which force them to the payday loan/pawn shop routine. My wife and I tried to coach, teach, counsel them that there is a much better way to do things. However, it seems there’s a part of human nature where if you’ve done something a few times, even if it’s not the best thing, well, you just keep doing it for the comfort of the familiarity.
There was one guy who would get his stuff from the pawn shop every Friday when he got paid. Two weeks later those things were back in hock and he’d get them out again. And again. And again.
This is the stuff of great head shaking, but it seems those kinds of people will always be with us.
There are times when someone may need to take a payday loan (car problems, home appliance, etc. In general though, I think most people are taken advantage of and the interest rate is absolute robbery.
I wholeheartedly agree that payday lenders prey on the vulnerable. Both the need for short term loans by those living on the edge of destitution and the willingness of others to exploit that need are ancient. Check out Nehemiah 5 in the Bible: the “payday lenders” of the time were forcing farmers in the middle of a drought to sell their children into slavery to pay back their loans!
It’s easy for those of us with even a little bit of wiggle room in our budgets to wag our fingers and say that savings are the key, and they are certainly part of the answer. But if “savings” means $20 out of every paycheck (5% of a $7/hr, 80 hour pay period…which is still out of reach for many), a medical, housing, or employment emergency can throw a family that is just scraping by into a downward spiral that may not be recoverable.
States like Ohio and Delaware have begun to regulate this industry, capping the APR or the number of loans that can be made to an individual. But this doesn’t solve the need for access to credit. Part of the solution IS more income; I think the “jobless recovery” has been mentioned on this site. But even with more low- and moderate- income level jobs created and better pay for those jobs, there will still be a small sector of our population who will be forced at some point to choose between a predatory loan or dire financial straits.
I’ve seen non-profit organizations try to step into this gap through community loan funds, financial education, etc., that provide fair access to credit while trying to move customers towards more traditional banking services & better financial practices.
Personally, I’d like to see banks experiment with different models and services to find a better balance of making a profit on these admittedly risky loans, and not trapping customers in debt-cycles that are impossible to escape. Capital One has done it with (admittedly, borderline abusive) sub-prime credit cards. Make a profit. Just don’t destroy your customers to do it.
I find it very ironic that you are ripping on payday loans (I totally agree with you by the way) while all of the ads on your site are for payday loans. Presumably they are auto-placed based on the content from the post but it is still really funny.
I don’t see any payday loan ads. If you have a URL, give it to me, and I’ll ban it. I’ve blocked them from the site entirely as a category.
I took a screenshot of the ads as I’m seeing them: http://imgur.com/s1571YJ
None of the three are payday loans. The first one seems like some sort of lead gen, no value, so I’ve excluded it.
Yes they should. They are really not helping people. They are taking advantage of people during hard times. The interest is ridiculous.
I will have to take the stance of banning them all together. There really seems to be limited good. My x fell into bucket 1 sadly and it can depending on your circumstance put you in a extremely deep hole. If there is a such a demand for a similar service surely the market will create an alternative. I am all for personal accountability but in the long run in life we are all chipping in towards someones stupidity sooner or later. Most people are financially uneducated to the extent they should be and I feel we have a modest responsibility to protect people from themselves. (as well as educate them)