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.

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Congress has set its eyes on a bill called the Payday Loan Reform Act that could make receiving a payday loan a lot more difficult.  The bill is sponsored by democratic Rep. Luis Gutierrez who wants to change abuse in the credit markets by placing a cap on the amount lenders can charge for payday loans.  However, this bill will probably cause more harm than good and reduce the supply of loans available as well as make borrowing more expensive.

State officials produced the legislation with the idea that consumers often don’t realize that payday loans are expensive and are accompanied by a hefty finance charge.  Opponents of the payday loan view the industry as an exploitation of the working poor and are convinced that borrowers are not sufficiently able to pay their loans back.

A study conducted in 2009 by George Washington University discovered that borrowers are not unaware of the expense they are paying.  Payday borrowers are making informed decisions and are rationally deciding on what is the least expensive way for them to meet a financial need.  More than 50% of borrowers stop to consider what their other credit alternatives are.  Before taking out a payday loan many think about using a credit card, bankcard, or even taking out a personal loan.  More than 80% of borrowers do not have enough money in their bank accounts to meet their expenses and use payday loans to avoid overdraft fees that are significantly higher.  Another 90% of borrowers are happy with their decision to choose the payday loan over other credit alternatives.

In 2008, the FDIC revealed an overdraft protection report.  According to the report, the average APR on a checking account overdraft charge was over a thousand percent.  This is more than twice the amount of the average payday loan.  Some banks will even deliberately attempt to increase how frequently customers are charged overdraft fees.  One way banks do this is by clearing large customer checks before small ones.

Despite this information, there is still legislation that could cap payday loan finance charges.  Unfortunately, government caps have proven in the past to have devastating affects.  In the payday-loan markets, price control makes the loans substantially more expensive, reduces the availability, and in some cases forces consumers towards very costly alternatives.

In Colorado, payday loan stores were able to supply people with lower prices, however, legislation in Colorado washed away the benefits of lower interest rates when a cap was imposed on finance charges.  Over time, payday loan stores must charge the maximum price on loans to remain profitable, which makes obtaining a payday loan in an emergency difficult.

The Democratic leadership of the House Financial Services Committee stated that payday loan borrowers need protection because they don’t have access to a mainstream financial system.  However, in most cases, payday borrowers are middle class Americans that have jobs, personal checking accounts, and access to various mainstream financial services.

John Caskey, a finance expert, discovered that the average payday loan borrower is married, young, with children, has a high school diploma and a major credit card.  The only difference between the non-payday borrower and the borrower is a financial crunch and a need for quick, short-term credit.

No one wants to be in a situation where they cannot pay their bills and meet all of their expenses.  However, these situations do arise, and when individuals have plenty of options at their disposal, they are better off.  The choice for a borrower to choose where they receive financial help should be left to the individuals and their creditors.

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