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® Joel Ohman

UPDATED: Feb 8, 2021

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Dana Williams no longer regards payday loans in a negative light.

When the 36-year-old travel agent began her journey with payday loans, she experienced financial turmoil repaying her debts and was forced to roll-over the loans.

But once she began to understand the short-term credit, she was able to use it to her advantage.

Now, 10 payday loans in, she said she approaches them differently. She is now prepared to repay her debts if she ever needs a new loan.

For her most recent payday loan, $700 to pay for several bills, she knew that sufficient funds were headed her way in the next couple days.

“When I first started, I didn’t really have much knowledge about how the financial world worked,” she said of her first borrowing experiences. “[As time passed] I got wiser and knew that, going in, I had to have a plan of action for how I would pay it back.”

Each type of consumer funding has both positive and negative stories, but the payday industry is one that seems to rarely offer anything positive. The loans can be abused just like any other form of credit, but for a significant part of the United States, payday loans are a necessary form of assistance.

Reports are published yearly about the industry, but statistics do not show the personal side. Even academia is trying to catch up with data.

Dr. Paige Skiba, associate professor of law at Vanderbilt Law School, told that when she began researching payday loans over a decade ago, academics were unknowledgeable about the industry and its importance. She now tries to cover the payday loan industry in an unbiased, scientific way.

“Payday loans are a crucial source of credit for millions of Americans, so it’s important for academics and policymakers, as well as consumers considering using the product to know how the industry works, what the benefits, consequences and potential pitfalls are,” Skiba said.

Skiba said there are both positive and negative aspects of payday loans — just as with credit cards, mortgage loans, and student loans.

“The debate about banning loans doesn’t usually include considerations regarding where people will turn for credit when payday loans are banned,” Skiba said.

Due to her research, Skiba said she is frequently asked if payday loans are positive or negative.

“It is not black and white,” she said. “It is a difficult calculation to make because they help some people in need, and harm some other people. There is no unequivocal evidence out there that payday loans are all bad.”

The Ever-Present Need

Payday loans are either condemned by state regulators or blindly promoted by payday lenders, but in the middle lies a customer base that uses this form of short-term credit frequently.

Twelve million American adults use payday loans annually according to a 2012 Pew Charitable Trusts report.  This amounts to 5.5 percent of the adult population in the country.

Despite some horror stories, there are many borrowers who are grateful for the access to money at times of need.

Another payday loan customer is Valrie Cobb. Cobb, the owner of a writing service, said the assistance provided by these lenders when faced with a car problem or an unexpected bill is valuable.

“It has helped me keep my utilities on because I didn’t qualify for help from the social service agency and I had used all of my options with the utilities company,” she said. “For the past year, my car has broken down or needed some type of repair every month, so being able to go to the loan place has kept my mortgage payments going.”

Cobb said that before using payday loans, she was forced to borrow money from family members which became difficult.

“It’s pretty hard asking for money each month. The payday loans don’t ask questions; you just qualify and they give you the money,” she said.

Convenience and Last Resorts

Bruce McClary, director of media relations for ClearPoint Credit Counseling Solutions, said that in his 19 years of experience in the finance industry, McClary said he has never interacted with someone with a positive payday loan experience.

As a counselor, he said he wishes he could speak with someone and ask how it worked for them.

But he continues looking.

Although he does not experience the positive side of lending, he does understand why so many consumers turn to this form of short-term credit.

McClary said that payday loan borrowers typically turn to the short-term loans because they lack sufficient savings or credit to use an alternate source. He stated that if consumers were willing to save ahead of time, or research other lending options, they would view these loans as a “measure of very last resort.”

McClary said that his organization recommends community-based credit union short-term loans, which carry significantly lower APRs ranging between 21 and 36 percent instead of around the 390 percent of typical payday loans.

“Consumers need to be aware of these choices and plan ahead,” he said.

McClary said that across the country, major lenders are creating different products to circumnavigate the legislature.

When that doesn’t work, lenders try to change the regulation. He continued stating that in Washington, Money Tree is exerting significant effort to push legislation that would make some of their financial products legal again.

The sides are so divided because of the way the loans are structured and the vulnerable consumers that are targeted. McClary said that funds are given to borrowers who are unlikely to be able to repay their debts. If a consumer is short on money when they take out a payday loan, then after 14 days, little usually changes.

“Guess what — they don’t have the funds to repay that loan,” he said. “And the balance grows and grows.”

But McClary understands what drives consumers to these loans.

It’s like getting milk at a convenience store.

If a consumer needs milk at midnight, but all of the grocery stores are closed, that consumer will visit a convenience store and pay an increased rate. If the consumer waited until the next morning they would be able to avoid the cost markup. For impatient consumers, they would rather have the milk (or payday loan) available right away instead of shopping around for a better deal.

McClary understands the convenience factor, but still said that consumers should take a 24-hour cooling off period for any financial decisions.

“If you make a decision in haste, you are always going to lose,” he said.

Williams learned this lesson at the beginning of her borrowing days. She is now more aware of how the process should work. And although she does agree that interest rates on payday loans are too high, she doesn’t feel that states should ever ban the loans.

“There should be legislation on how much interest rates they can charge but not get rid of them altogether,” Williams said.

Without payday loans, despite their risk and cost, she would have been hopeless without the service’s help.

“I wouldn’t have anywhere to go,” she said. “I have a bad credit rating so I couldn’t go to a traditional bank. I don’t have any family and friends that I could borrower money from.”