I have been in the unfortunate situation to use payday lenders and title loan companies. I am usually hesitant to support further government regulation of any sort, but the rates these companies charge is pure usury. You ask why people would sign up for these abusive agreements?  They feel they have no other option. It is similar to entering into indentured servitude.  When one feels their back is against the wall, they make irrational, short term decisions just to buy time to figure a way out of the situation. The way these loans are set up, they are nearly impossible to pay off.  

I agree that the proposed legislation is onerous and may go too far, but these lenders substantially profit off the poorest among us with the fewest resources. They can remain profitable businesses at 15, 20, even 30 percent interest rates. Their charges, however are  400-800 percent APR. Few customers are able to pay the loan off the next payday, and charges range from 15-30 dollars per hundred to refinance- every pay period. This is why so many branches and locations have popped up over the last decade. 

It has been my experience that the people who resort to these loans are living paycheck to paycheck, with little or no savings.  They suffer an unexpected expense, and take one of these loans. However, their next paycheck is already spent, so they must refinance the loan. If they borrow $300 for example, and pay $100 the next pay period, only $70 goes to the loan balance. Next pay period, they pay $100 on $230, and so on. Add the fees, and one usually spends over $500 to pay of a loan of $300. This is typically a best-case scenario. If a person is using these services, they most likely can't come up with an extra $100 per pay period, so the loans are extended further. These companies claim it is due to high risk, but they all require access to remove the funds directly from your checking account, or a signed check so they have further legal remedies against those who don't pay. Title Loans work in the same fashion, secured by the vehicle and only 30 percent of the wholesale value is offered.  Even if the customer does not pay, and the loan shop has to recover the vehicle, it is sold and the loan shop still makes a steep profit.

These lenders of last resort do need to be regulated. They are highly profitable businesses that prey upon those who feel they have no other option. They are modern versions of indentured servitude and selling of children by the poor. Those were past horrors committed by and against desperate people. There is room to allow strong profits without causing extreme hardship.  Normally I agree, let the market decide. However, these businesses do not cater to the market as a whole, they prey upon a part of the population without market options.


This post is a response to Wayne Abernathy's analysis of recent payday loan regulations.