How Payday Loan Bans Hurt Consumers
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UPDATED: Sep 7, 2012
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The payday loan industry has seen better days. Just a few years ago, as the economy worsened, the cash advance loan business soared since financially desperate Americans turned to cash advances in order to make ends meet. But with more and more Americans taking out high interest payday loans, it was only a matter of time before some unscrupulous and unethical lenders appeared on the scene to take advantage of borrowers.
Previously, payday loans could be applied for by using fax machines. But as technology advanced, fax machines fell by the wayside and no fax payday loans became the norm. Now, just commonly called payday loans, this form of financing is a burgeoning business.
Like all industries, the cash advance loan industry has its share of “bad apples.” Sadly, these bad apples have spoiled the bunch—at least in the eyes of some regulators.
The growth of the payday lending industry spread both offline and online as more retail lenders opened up in low-income neighborhoods while online cash advance websites multiplied drastically. Realizing the need to halt—or at least slow—the proliferation of this industry, regulators developed laws that limited interest rates, loan amounts, fees, and even retail locations. Some regulators even went to extremes and outright banned the industry from operating within their states or communities.
Unfortunately, banning an industry with such an apparently gargantuan demand may end up hurting the very borrowers that the regulation sought to protect.
The Cure Is Worse Than the Disease
While regulators no doubt have borrowers’ best interests in mind, that does not mean those lawmakers are incapable of making poor decisions. By banning cash advance loans in several states, regulators may be doing more harm than good.
Cash advance borrowers are generally low-income earners that are not financially stable. These people turn to cash advances because they often do not have the money necessary to pay for rent, utilities or groceries. Few people would borrow payday loans simply to spend the money on recreational or disposable purchases since these loans carry such high interest rates.
Since cash advance lenders don’t take credit scores into account when lending money, payday loans carry high interest rates to protect lenders from risky loans made to bad credit borrowers. But these products are one of the few—if only—options for bad credit borrowers to obtain money.
Banning payday loans robs borrowers who demand this product of financing options, and it essentially forces these borrowers to settle for more harmful alternatives.
Bans Bruise Borrowers
Once payday loans are gone the borrowers would do what they must in order to survive.
By spending sorely-needed savings and depleting checking accounts, would-be borrowers risk bouncing checks. Bounced checks result in large fees, which, in itself, is a roundabout debt-trap. This could potentially leave some would-be borrowers vulnerable to eviction, foreclosure, or even hunger. People who cannot afford utilities face them being shut off. Subsequently, there can be reconnection fees, which would further tax already ailing accounts.
Some cash advance loan borrowers have credit cards. These would-be borrowers could use their credit cards to withdraw cash. But doing so would prove costly since using a credit card to withdraw cash often results in expensive fees coupled with high interest rates.
Without short-term lending, would-be borrowers might be forced to liquidate valuables. Selling or pawning assets to pawnshops in order to scrounge up money wouldn’t be outside the realm of possibility.
Finally, desperate or uninformed people sometimes turn to loan sharks. Needless to say, this is a dangerous prospect since many loan sharks are criminals that only lend money at usurious rates. While a payday loan ban may financially bruise borrowers, loan sharks can literally bruise borrowers.
Despite regulators’ best efforts, the online payday lending landscape is far from controlled. Online, borrowers around the country can find cash advance loans readily available for their use. While payday loans made online may be illegal in states where retail payday loans are already banned, enforcement is uncommon.
This lack of enforcement has been a leading cause of borrower abuse. The online landscape offers an escape route for borrowers who feel trapped by cash advance loan bans.
Regulators must realize that borrowers will pursue payday loans online if they are banned offline. In this war of regulation, law makers may win the storefront battle, but they’ll surely lose the online war.