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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There have been major setbacks in legislature with a plan to cap rates for payday lenders. Lawmakers think regulation can be done keeping in mind the favors of the industry. The bill proposes to cap rates at 36% and has been assigned to a committee of the lawmakers. It is said that if Payday loans are rolled over many times it may cost the borrower up to 500% annual interest.

The only state which does not have regulations for dealing with payday lenders is Wisconsin. After a hearing on Payday lending, the chairman of the financial committee, Rep. Jason Fields said that a cap on rate is not needed and due to lack of support from Sheridan and the Senate the committee is unlikely to pass a cap. According to him doing something which the Senate will not pass is not justified. Other regulations however will be approved. According to Fields, Poverty was there in Milwaukee even before payday loans.

Although, Gordon Hintz acknowledged his bill might not pass, yet he was of the view that rate cap is best way to regulate the industry. Sheridan’s statement that rate cap went too far was the first setback that Hintz faced last month. Industry said that a 36% cap will throw them out of business.

With four alternative proposals, cap title loans will require lenders to report more information and limit late payment charges and bar on rolling over two week loans thus practically banning it. On Wednesday’s hearing saw much audience with stickers saying ‘I choose payday advance’ lobbying, which was also testified by supporters of rate cap.

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