For those who aren't familiar with payday lending, here's how it works:

Mary Smith runs short of cash and needs $50 or $100 or $500 till payday. Most banks won't lend small amounts, and even if they did, many Mary Smiths wouldn't have the credit rating to get a loan from a bank. So Mary goes to her local franchise of Check Into Cash or American Payday Loans, writes a check for $345 and postdates it until her payday, say ten days away.

The loan company gives Mary $300 and tells her to come back on the date the check is written for. When she comes back, she either pays $345 to get her check back or "rolls over" the loan by paying another $45 and postdating a new check until her next payday.

Not surprisingly, such loans are easy to get into trouble with. As you can see, if Mary rolls over her loan six times, she's paid almost as much in "fees" as she originally borrowed. ("Fees" is emphasized because they're the payday lender's way of operating legally. The $45 is not called interest, but a lending fee. If it were considered interest, the APR would be over the moon).

Critics of payday advance practices say that these loans further ensnare the working poor in a trap of debt. Defenders counter that payday loan companies offer financing options to people who would be unable to get approved anywhere else.

My question for debate is this:

Should payday lending be illegal?

Should stricter regulations be placed upon it? If so, what regulations would you suggest?

Here are some other accounts:

http://www.bankrate.com/brm/news/chk/19980217.asp

I think it's sharking, but then again I think legal gambling is sharking. It targets people who really are clueless and desperate.

Really, who would do these loans other than someone who couldn't afford to pay for the loan?? I work at a bank and have talked with people that have done these loans and the places will hunt the people down.

But then again, my bank puts these same people into nearly a 30% interest car loan.

If you believe in personal responsibility, it should remain legal. No one is forcing you to get the loan. And apparently our gov't thinks that lenders, no matter who they are, are not responsible for the misfortune or deperation of the people they lend to (see new bankruptcy laws).

Now, if you have compassion for people who can't take care of themselves then you may have a different opinion.

Now, if you have compassion for people who can't take care of themselves then you may have a different opinion.

Quote of the year, I guess...

Should payday lending be illegal?

There certainly should be tighter reins put on this sort of loan. The interest rates are enormous, often hundreds of percent per year. link

I believe that we need to focus some education efforts on money handling. I don't think people understand how much money they are spending in order to get these types of loans. They are charged billions in fees, a few dollars at a time, and don't even realize it.

Of course, in general people who can be disciplined with their money do much better in the long term. It is unfortunate that some people simply do not understand how much these loans actually cost them.

Should stricter regulations be placed upon it? If so, what regulations would you suggest?

I think capping the fee structure on a percentage basis of the loan would be a good start. Instead of the current 10-15%, it should be 1-2% (still outrageous, but these are high-risk loans).

This is scary:



Of course, the people who can least afford the gigantic fees charged by these companies are the ones who are most victimized by them.

I think Amlord has the right idea. Let's not make these operations illegal. (If nothing else, doing this might send desperate people out to real loan sharks; the kind who break your kneecaps if you're late with a payment.) However, I see no reason why they should not be regulated in the same ways that banks and other lenders are regulated.

Should payday lending be illegal?

Should stricter regulations be placed upon it? If so, what regulations would you suggest?

This is a tough one for me. I tend toward the libertarian, but I can see a role for some regulation here. Maybe a maximum interest charge per customer, per year? If you're only loaning them one paycheck at a time, you don't need to charge 5 paychecks' worth of interest to cover the risk of default.



That reminds me of (Penn Jillette's?) definition of the lottery: a tax on people who are bad at math. Only in this case the people who are offering negative 50% ROI aren't promising to give half of it to the schools.



Do the new bankruptcy laws have much effect on people in this category? I thought that the major differences only applied to people making more than the median income. A payday-loan addict who's making more than the median income is probably addicted to something even more expensive...

Should payday lending be illegal?
Great topic. Payday lending should be a state's rights issue. Treat it like gambling. I don't see a problem outlawing it or leaving it alone.

Should stricter regulations be placed upon it? If so, what regulations would you suggest?
While I like what Amlord is saying, I believe the cost of monitoring this is not something that taxpayers should be paying for. My question is, what's the root cause of this problem? Poverty (people are desperate because they are poor)? Education (people are desperate because they can not handle their money)? If you have a job, I don't think the problem is poverty. I think the prevalence of payday lending is a direct result of the failure of our schools to educate our citizens in handling money. So what's the solution? School vouchers.

Should payday lending be illegal?

If it were, then what would replace it? It exists for a reason....the people who use it need the money. If this were gone, where else would they get it?

Should stricter regulations be placed upon it? If so, what regulations would you suggest?

Perhaps...I'm not that familiar with the regulations that might already be placed upon it.

There is an underlying assumption here that this is indeed a problem. Sure, they charge outrageous interest. However, they probably also have an extremely high number of defaulted loans. I haven't seen that side of the equation, so who's to say whether the interest they charge is justified or not? If these businesses really made exorbitant profits, then you'd see them popping up all over the place....which would increase competition and drive down rates. I don't see that happening, so perhaps this is already functioning in a market equilibrium, with normal profits?

This strikes me as very similar to the Rent-a-Centers. You ever see what their annual interest worked out to? Very high...but then again, their customers usually can't get credit elsewhere, that's why they're there. So, they're allowing these people to get furniture, etc. that they wouldn't otherwise be able to get. There's usually two sides to these things...you can't make judgements on them only looking at one side.

Should payday lending be illegal?

Should stricter regulations be placed upon it? If so, what regulations would you suggest?

I do not see any reason for it to be illegal. However, I think it would help significantly if they would show what the yearly cost would be. If the loan costs $45 and is extendable every two weeks, they should say that it comes to $1,170 per year until it is paid off. Not many people can readily compute their annual cost for a loan. Most of us would whip out a calculator to compute 26x45.

But even with this consideration, I am still skeptical about suggesting that the government get involved. If they clearly state that it costs $45 every two weeks, then anyone with common sense would be able to conclude that paying off the loan would eliminate that expense. Credit cards charge various different fees and charge interest as well. Those who abuse credit cards are foolish. Those who abuse payday loans are even more foolish because they are not accessed as easily as simply swiping a card.

The fact that these loans affect mostly the poor is not the fault of the loans themselves. It is a byproduct of our economy. In general, the more money we have, the easier it is to make more money; but the less money we have, the easier it is to lose it.

Should they be illegal, I think not?

Regulations? Yes, but they need to be for both sides, because the loaner has as much responsibility as the loanee. I think the double-responsibility thing in this country has been lost.

I'm not an expert on the new laws, but it's my understanding that UNSECURED credit debt is no longer dismisable in a bankruptcy.

So the old adage of "don't pay off credit cards with home equity because they can't take your home for credit cards" is no longer the case.

So from my understanding if someone takes out a pay day loan, declares bankrupcty, the loaning company can still come after future earnings for that payday loan.

That was my point. Now credit companies can be reckless with who they give money to because people cannot avoid the debt even through bankruptcy.




Well it's coming back in a BIG BIG way. Although now, you are responsible for your impverished, uneducated, self, while the company with their 200 lawyers, 200 lobbists, and 20 paid-off senators are responsible for themselves.

Yeah, it's becoming a real great place to live. Billionares and the walmart workers who need payday loans to pay for medical coverage. That responsibility thing is really starting to make soldiers of people. WHo knows, maybe people will take on real responsibility and elect an American Chavez....you know, self-responsibility
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