Payday loans and a profile of the average borrower

The lending industry has come under a lot of fire recently due to the fact that the interest rates charged for payday loans are at best expensive and at worst, predatory. The payday loan business is thriving and is growing more rapidly than anyone could have predicted a few years ago. There are presently more quick cash loan stores nationwide than there are Subway, Burger King and McDonald's restaurants combined. With rates of interest that can amount to more than 400% annually, payday loans represent one of the most expensive ways to obtain cash.

Continued below

The surveys on the typical quick cash borrower disagree with those put forth by the industry. The cash advance industry claims to offer a much-needed service in the community and claims that their typical client can afford the cash advance and takes them out of convenience, rather than necessity.

The press releases that defend the lending industry may be argued at length, but the loans continue to be popular despite restrictions that demand that the lender disclose all terms in writing. One claim that cash advance lenders regularly make that is simply not true is that their typical client is not poor, but instead from the middle class who just borrows from them for convenience. The industry defends its prices, pointing out that A) they are selling ease of use and B) the interest rates they charge aren't really interest, they are fees and C) the loans are for durations of 14 days, rather than annual, so the yearly interest rate is moot.
 

A recent study performed in Arkansas paints a significantly different picture from the rosy one suggested by the payday loan industry. Studies suggest that the typical payday loan customer is not particularly well off, and obtains loans because they really need the cash.

• Based upon the survey, 50% of the respondents said that they applied for bank financing before obtaining a cash advance but were denied due to a bad credit history.
• Greater than seventy five percent of customers did so because they were receiving threatening letters from creditors to whom they owe money.
• Two thirds of respondents said they took out a cash advance because they just had no alternative.

This study powerfully suggests that the primary recipients of these advances are indeed the underprivileged. The typical customer does not obtain these advances because they are convenient, but because they are actually the only option to borrow money to pay bills or get by until the next payday. It's a pretty sad state of affairs when the only practical source some consumers have to borrow money is one that costs at least four hundred percent a year

South Dakota set up loose lending laws to bring banks to the state, only to see cash advance stores opened on every corner. Legislators in many states continue to try to find solutions that will permit these taxpaying businesses to stay while protecting the people who clearly have no other source of funds. There is no simple answer to managing the interests of both lenders and consumers, as the lawmakers in South Dakota have discovered. Clearly, lax lending regulation cuts both ways. The market continues to decide whether or not these stores will continue to operate, because if no one wanted these financing options, no one would pay for them.