Payday loans are being vilified from all corners and yet they are a legal thriving industry both online as well as in the brick-and-mortar space. The obvious conclusion would be that there is obviously a demand for such a supply, but payday loans have been unwittingly saddled with a negative reputation.
The most common allegation against payday loans is that it encourages predatory lending which exploits helpless clients by charging them higher rates. The payday lenders, on the other hand, assert that clients are fully aware of the costs before a contract is signed and that the rates are in concurrence with operating costs.
With the rhetoric on both sides going full throttle, it is advisable to take a balanced look at the statistics with the help of Aaron Gold’s thesis, ‘Payday lending: Grounding the Policy Debate Through Economic Analysis.” In his thesis, Gold concedes that high operating costs do somewhat justify the high rates and although the profit margins for payday lenders are much higher than for traditional lenders, they are not nearly as outrageous as some critics claim.
Regarding the demography of payday loans, statistics point out that traditional banking seems too much of an hassle for the majority especially the lower income classes or the immigrant communities (Douglas Mc Gray- ‘Check Cashers, Redeemed’). The public relations efforts made by payday lenders seemed to have paid off as the payday loan stores appear to be a convenient, one-stop shopping stop for those needing emergency cash.
Also, it is absolutely false that payday lenders prey upon people who do not have the wherewithal to repay. In fact, only those who have a verified steady income are eligible for such payday loans.
Comparing payday loans to taxis, Huckstep says that “Expensive for long trips, but perfectly viable for short distances” (Huckstep, 2007, p. 207). Used intelligently, payday loans can save money for clients over more expensive alternatives.
As for the allegation that payday loans are very expensive, both Gold and Huckstep point out that the rates are very much in keeping with the overall fed averages and customers are fully capable of handling their payday loans when compared with other loans.
Although it may appear that payday lenders enjoy greater profits than traditional lenders it is nowhere as outrageous as critics would like us to believe. In fact, Gold points out that lack of growth opportunities within the payday lending industry has resulted in dramatic decreases in profits.
Paradoxically, payday loans gain from volumes yet over saturation may be a contributing factor in reduced profits. Payday loans also offer a good return on assets and equity as payday lenders require much less operating capital to produce positive returns. The mortgagee crisis in 2008 may have sent the traditional lenders down but payday lenders rallied around to post positive returns on equity.
Gold advises payday lenders to think in terms of, if “store density is a function of price, then a reduction in density would increase loan volume and profit at remaining stores” or reducing density to increase volumes and yet make decent profits. Payday loans are a viable alternative to traditional loans but could benefit from some sort of regulation to ensure equal customer- lender relations.
