All sound and fury over payday loans

There has been a lot of discussion about the practice of payday lending recently.

Many self-appointed "consumer" advocates deplore the fact that people choose to borrow money from these lenders and are upset that these institutions have proliferated over the past decade. However, the loans are popular with consumers and are often the best alternative many have for necessary cash. There is no reason to take away this option from consumers who choose it.

A payday loan involves a borrower proving he or she has a job and making out a post-dated check to a lender as guarantee for a short-term loan. At its essence it is a loan like any other. Its details differ but the principle remains the same - a lender and borrower agree to a transaction where the lender will loan money to someone at a rate of interest that is agreeable to both. No one is forced to take a payday loan. Given the growth of payday lending locations in the past decade, it seems that quite a few people want to borrow money in this way.

Unfortunately, there has arisen a movement in Ohio of people who look down on these borrowers and implicitly question their intelligence. This group second-guesses borrowers saying they are not savvy enough to make their own financial decisions. This enlightened group of people, guided by what they perceive as better intelligence or loftier intentions, feels that borrowers are being tricked by payday lenders.

It is hard to see how this is the case. By law, payday lenders must clearly explain their fees.

According to surveys of borrowers, almost all understand the terms and fees of the loans they took. If borrowers are clearly aware of the cost of the loan and when they are required to pay it back, how are they being tricked?

Opponents of payday lending contend that lenders structure loans to trap people in a cycle of debt, mercilessly preying on them to extract maximum profitability. Again, there is little data to support this. Studies show that repeat borrowers are no more profitable than any other borrower. Furthermore, the evidence indicates that the "cycle of debt" that may trap some payday borrowers is not caused by payday loans. Instead, the borrowers' shaky financial condition is at the root of the problem. As evidence from states that have banned payday lending illustrates, if these loans are banned it will not eliminate the financial problems for these people. In fact, by denying them this financial option, it may make their problems worse.

One tactic the opponents of payday lending like to bring up is the ostensibly high annual percentage rate of payday loans. However, an annual percentage rate is purely theoretical. Payday loans are usually made for two weeks and lenders charge people $15 per $100 borrowed. Borrowers understand this. While most cannot tell researchers the annual percentage rate of their loan, almost all know the fees they are required to pay. Borrowers focus on the real cost of the loan, not its theoretical yearly rate.

For many, payday lending looks like a shady business. It is certainly not a good idea for some people. But for others, payday loans are the best alternative they have. When faced with an unexpected financial situation, a payday loan may make the best sense. They are willing to pay high fees because of the convenience of payday lending.

Source:http://www.timesgazette.com/main.asp?SectionID=1&SubSectionID=1&ArticleID=149749&TM=64088.1