Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 26, 2012

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A mix of desperation, uninformed borrowers, and predatory lenders are to blame for the ongoing trend of rising instant loan opposition. Across the country many states have been spurred to limit or outright ban the lending of instant loans. These states have been pushed towards these measures by various special interest groups that claim to represent the common borrower and consumer.

It is common knowledge that America is still struggling through the recession. Now that almost everyone has a lighter wallet—or an empty wallet—living hand-to-mouth isn’t so uncommon. Instant loans have steadily risen to be something more and more Americans borrow.

Lost jobs from the recession mean lost income. A chain reaction leading to repossessed cars, foreclosed homes, and an early end to dreams of an education and retirement can all be the result of unemployment. To survive, many Americans borrow payday loans, but most see them as a temporary—albeit necessary—measure. Payday lenders have spread to near ubiquitous levels in cities across America.

Predators and Protection

Unfortunately for many borrowers, not all payday lenders are equal. Desperate people are easily targeted by unscrupulous instant loan lenders.

Famous race car driver Scott Tucker, of Johnson County Missouri, along with his associates, was accused by the Federal Trade Commission of deceiving and entrapping instant loan borrowers. Tucker, working in collusion with Indian tribes, was able to obtain a measure of immunity by cleverly becoming an employee of the tribe’s payday operations.

Online lenders, who often operate across state lines, are also known to abuse borrowers. Many of these lenders have even used harassment via phone in order to get their payments from defaulted borrowers.

To counter payday loans’ excessive interest, roll over fees, and borrower vulnerability, many states — and even our military — have taken measures against instant loan lenders.

Some states, such as Arkansas and Arizona, outright prohibit payday loans. Other states, such as Delaware and Alabama capped loans at $500.

However, some states, like Maine, still have no limits on instant loans or accompanying financing fees.

The military passed the Military Lending Act in order to protect service members, who often reside on bases surrounded by payday lending establishments, from usurious and predatory lending practices. Since members of the military are typically young, low-income earners, and uneducated in regards to financial wellbeing, they are often vulnerable to falling prey to high-interest short-term loans.

Battle Lines Are Drawn

Despite the actions of unscrupulous lenders, the instant loan industry is a $52 billion industry. The industry could not have reached this size if all borrowers were defaulting or rolling over their loans. The majority of instant loan borrowers do repay their loans, and they successfully leave payday borrowing behind.

Regardless, payday lenders have found a new enemy in the form of consumer advocacy groups.

In Texas, the Texas Faith for Fair Lending formed as a coalition of groups opposed to the industry. They successfully achieved the regulation of payday lending locations in several Texas cities.

Meanwhile, in Montana, voters capped instant loan interest rates last year.

In Missouri, the Missourian’s for Responsible Living organization pushed for limiting interest rates, fees and finance charges on a broad range of financing, including payday loans.

This trend of opposition is a result of minimal regulation for lending in some states, but it’s also a direct consequence of usurious lenders’ actions. While not all lenders are usurious predators, there are clearly enough of them to anger borrowers and activists.

Exacerbating the problem is a lack of financial education and awareness. The average American high school—or college even—typically lacks courses and classes on financial budgeting.

This lack of education combined with the financial squeeze that nearly everyone has suffered in our recession-burdened country has caused, and will continue to cause, opposition to payday lenders.

It remains to be seen if in due time that payday lenders will be forced to operate completely online. Should this happen, it may be both a blessing and curse: a blessing for payday companies that may have minimal overhead and easier access to customers, and a curse to borrowers who will be forced to work with online lenders that are much more difficult to police and regulate.