Imagine the World Without Payday Loans
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UPDATED: Dec 27, 2011
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“[Economists, lawyers, psychologists—career experts—are] aware that consumers will be driven to inferior substitute credit products if payday loans become less available. They understand that eliminating supply does not eliminate demand. They will want to know what will replace the payday loans that are proposed to be outlawed. They don’t care about getting votes.” —Lawyer Hillary B. Miller
Take a moment to imagine the world without payday loans. Given the popular opinion of articles, books, and media news stories, it would come as little surprise if those who were asked to consider this question jumped for joy. Consumer advocate groups would smile and nod as one of entities they’ve labeled as their arch-nemesis no longer existed. Good would triumph over Evil—Dark would be extinguished by the Light.
But is that really true?
Imagine that world again, but this time make sure to take into account everything related to this type of financing. Think about the ease of obtaining money, the demographic that uses this form of borrowing, the requirements to qualify, the consequences payday loan users would face without access to this form of financing, and, finally, the other means payday loan users would turn to for money.
An Introduction to the Debate
When the public hears sad anecdotes involving payday loan borrowers who found themselves spiraling out of control with debt, they naturally develop a mob mentality. Mainstream media sources love to herald themselves as public heroes, so they fuel that fire and try to stand up for the minority—the defenseless. But in doing so, logic and reason are often exchanged for emotion, and, when all is said and done, a bitter opinion is formed without ever allowing the other side of the issue to introduce itself.
That’s not discrediting the sad stories some borrowers have experienced as a result of payday loans. But to consider those experiences as accurate depictions of all users’ experiences is to be guilty of the fallacy of hasty generalization—the father or all forms of bigotry and hatred towards anything.
However, assuming a consumer advocate doesn’t mind generalizing, then they would need to explain their stance on borrowers who get caught in a seemingly never ending hole of credit card debt. They would need to justify the fact that people lose their homes to foreclosure. They would have to give a valid explanation as to why car repossessions are permitted. The fact remains, default is not exclusive to payday loans, but rather there are those who succumb to debt traps in all types of borrowing.
It’s important to consider all of these other “debt traps,” because as lawyer Hillary B. Miller wrote in an article, “There is no unambiguous research showing that payday loans are ‘bad’ for a majority of borrowers.” People default on payday loans much like people default on any other type of loan—but that doesn’t mean the majority are unable to use the service to their advantage.
Eliminating Supply Does Not Eliminate Demand
Payday loans are used by those who need cash now. If online and store-front lenders packed up shop, or were forced to close down due to government-imposed regulation, those who need cash now wouldn’t, all of a sudden, be relieved of their debt burden. They would still need cash to pay their car loan, phone bill, grocery bill, or emergency medical expense.
“Let’s say I get paid on Tuesday, but my rent is due Monday,” posed Rachel Schneider, innovation director at the Center for Financial Services Innovation, in a credit.com article. “Banning payday loans doesn’t solve the very real problem of cash flow mismatch for low-income people.”
As Steven Schlein, spokesman for the Community Financial Services Association, further explained to credit.com, “If people need a loan, they’re going to get it. They might get it from an illegal web site. Some may go to the mob. Or maybe they go to a local bar where they hear they can get an illegal, short-term loan.”
Inferior Substitute Credit Products
One of the most compelling arguments in support of payday lending is that it enables borrowers with no credit and little collateral access to quick cash. Historically, those in need of money that couldn’t qualify for loans at legitimate lending sources would turn to loan sharks.
The hidden world of loan sharks is one far more hellish than many realize. It’s not simply atrociously high interest rates that borrowers face, but instead they deal with a hostile group of collectors that know no limits when it comes to squeezing payment out of their clients.
For instance, consider the case of Paul Nicholson, a loan shark in Cheshire, England. According to BBC news, Nicholson “raped, blackmailed, and assaulted his poverty-stricken clients.”
Upon missing but a single payment, Nicholson would show up to his borrowers’ homes with baseball bats and brass knuckles. If a borrower was female, he would give the option to “pay ‘in kind’ and perform sexual acts for him if they could not keep up with their spiraling debts.”
One of his borrowers, a 22-year-old-man named Brian Shields, killed himself over a small loan that, in just three months, skyrocketed to a total of over ten times the amount he took out.
The underground operations of loan sharks were not made up by Hollywood, nor are they exclusive to third-world countries. What’s more is that loan sharking still occurs in our country, despite the fact that there are sources available for quick cash. Imagine the growth that illegal lending would experience if the millions of annual payday lending transactions were prohibited by law.
They Don’t Care About Getting Votes
These examples and points in favor of payday loans are not meant to shove all complaints about this industry aside. Like most industries, this one is not perfect, and sometimes there truly are victims that are preyed upon by unscrupulous business practitioners. But while the cry of one should never be ignored, it shouldn’t necessarily dictate the way the entire industry is treated.
Returning to Mr. Miller’s opinions expressed earlier, the decision to keep payday loans around and not snuff them out with regulation is something that needs to be considered with an open mind and objective attitude. Miller speaks extensively about the Consumer Financial Protection Bureau (CFPB), lending his support since, in his words, the CFPB and all the policies it has control over would be determined by the CFPB’s staff, not an elected official. Decisions wouldn’t be made in order to win votes, or to persuade readers to subscribe to a publication. Rather, careful consideration would be used, and all bribes or rewards—votes, readership, money—would be set aside.
Future laws and proposed bills pitched by the CFPB will hopefully be made after extensive thought, and a world without payday loans will be considered before trying to actually rid our nation of these lenders.