10 Reasons Payday Loans Should Be Banned
Most of us can recall being in a financially difficult situation. For many people, it only takes one unanticipated expense to cause significant financial distress. Payday loan companies are structured to take advantage of this sudden need of an influx of cash. Payday loans, or cash advances, as they are also commonly called, grant the borrower a sum of cash that must be repaid on his or her next payday, along with fees and interest. In theory, it seems like an ideal arrangement. The borrower gets the money he or she needs, when he or she needs it, and the lender makes a profit from the exchange. In practice, however, things work very differently. Unbelievably high interest rates and other fees, along with the borrowers own financial situation, can often make repayment virtually impossible. Taking out yet another advance, or rolling the loan over, is often the only solution available.
Payday loan companies have rightfully been called out in recent years as predatory lenders, for this very reason. Despite past and pending litigation, and an increase in consumer awareness, it’s still a thriving industry. Part of the reason is that the current economy has caused a number of people to fall into financial distress. For those people, payday loans seem like an attractive, albeit short-term, solution to a desperate problem. Attempts at industry regulation and consumer education have failed in a number of states. The best long-term solution to the problem caused by payday loan companies is to ban them altogether, for the reasons outlined below.
10Payday Loans Do Not Solve Underlying Problems
Most people believe that payday loans are designed to help people bridge the gap between paydays and to cover unanticipated expenses that may pop up. The reality is that these loans are very rarely used as intended, and even when they are, do very little to solve the underlying problem behind the need for emergency financing. They may provide brief, momentary relief, but in the long run can actually prove to be detrimental to the borrower’s finances.
Banning payday loans would force community agencies and politicians alike to investigate alternate solutions to temporary financial need. Payday loan companies tend to prey on vulnerable members of society, the economically disadvantaged, and even recent military veterans. Banning these types of companies from operating not only limits the scope of their harm, but also forces a conversation about alternate solutions. For example, knowing that individuals have access to cash advances when expenses pop up, however usurious the terms may be, may prevent community leaders and politicians from exploring other options. The effect of this type of blind spot is that borrowers will continue to get trapped in debt.
Borrowers in states that do not allow cash advance companies to operate are not at any more of a disadvantage than those with easy access to payday loans. In fact, as studies have shown, when time and effort is put into helping those in need, the community as a whole benefits. Borrowers themselves will investigate alternate options when access to cash advances isn’t readily available or easy to find.
9A Ban Would Encourage Better Business Practices
Banning payday loan companies from operation will eventually help encourage better business practices across the financial industry. Companies that truly want to be in the business of helping the economically disadvantaged access funds when they need them the most will have no trouble revising their business practices to meet the legitimate needs of their market. While these companies may no longer be able to offer short-term loans based off of a borrowers paycheck, there are other ways to legally offer temporary financing when an individual is in need. Prohibiting shadier and less reputable organizations from operation should not hinder a legitimate lender from operating with the new legislative system.
Lobbyists commonly point to legitimate lending businesses as innocent victims in the battle to ban payday loan companies from operating. However, there is nothing in the framework and guidelines proposed by the Consumer Financial Protection Bureau that would prevent a lender from operating honestly and ethically.
Payday loan companies tend to engage in a number of questionable business practices. Certain companies have been found to push re-borrowing onto their customers pushing them into a debt cycle. Other businesses engage in especially aggressive collection strategies. These less than reputable business practices often result in further economical disadvantage to the debtor. Things like losing a bank account, repossession of vehicles, and even wage garnishment can occur, pushing the borrower deeper into debt. Legislation prohibiting these practices will only encourage companies who want to remain in business to adapt better and more ethical practices.
8Payday Loans Encourage A Cycle Of Borrowing
Payday loans don’t usually require a credit check and can be obtained quickly. These two qualities make them popular with those who have pre-existing and currently outstanding debts. In many cases, the borrower is unable to repay the entire loan when it falls due. Payday loan companies will “work with” the borrower, providing him or her with yet another payday loan. The result is a cycle of borrowing, being unable to repay, and subsequently re-borrowing. Individuals who are economically disadvantaged in particular can fall into to this debt cycle quite quickly, without an easy way to get out. In extreme cases, payday loans as low as $200 can wind up costing the borrower thousands.
Cycles of borrowing and re-borrowing may seem to be fringe cases, anecdotal evidence at best. That’s precisely how cash advance companies usually present them. However, many of these companies have actually built their business model on this very concept. ACE, a very popular cash advance business, was caught pushing this exact cycle in their employee training manual. At the time, the Consumer Financial Protection Bureau accused ACE of pushing consumers “into debt traps.” While ACE was fined and has officially removed the policy from their training guides, the business practice persists. High interest rates and increasing fees help to keep the borrower in debt, while lining the pockets of the payday loan company. Cash advance businesses make far more money in situations like these than with consumers who repay their loans on time, and without re-borrowing.
7They Can Be Financially Detrimental To The Borrower
Precisely because payday loan companies make their profits by relying on re-borrowing, and the fees and interest rates that go along with it, taking out a payday loan can be financially detrimental. In the majority of cases, borrowers are not using payday loans to cover a one-off expense, but instead to pay down bills that will still exist when the payday loan comes due. The result is usually a need to either re-borrow or to avoid making other, important monthly payments. This can trap consumers in a seemingly endless cycle of debt, ultimately resulting in the loan being to the borrowers detriment in the long run.
Not only is this debt cycle harmful to the borrower, but it can also have a ripple effect throughout the entire community. A borrower unable to repay his or her payday loan, but fearful of any aggressive action the company may take to collect, may opt to avoid the hydro bill or cell phone bill instead. Choosing between repaying a cash advance and ensuring the lights stay on should never be a decision any of us face. Unfortunately, thanks to the prevalence of payday loan companies throughout the country, it’s a sad reality. Banning these places from praying on those who need economic assistance the most will only have a positive impact. It can prevent many borrowers from permanently ruining their credit and helps them to find alternate sources of funds in true emergency situations. Another benefit banning this industry has is that people will inevitably spend less on interest, freeing up more money to go towards other debts.
6Bans In Some States Have Been Effective
To date, fourteen states and the District of Columbia have put policies into place effectively banning payday loan companies from operating. At least four other states have enacted restrictive policies essentially preventing cash advance companies from charging high fees and interest rates. Most of those states, like New York, always had policies in place prohibiting short-term, high interest loans. Others, such as North Carolina, Arizona, and Montana, briefly relaxed their laws and allowed cash advances companies to move in for a period of time. One popular argument in favor of payday loan businesses is that there is a consumer demand. Proponents of the cash advance industry insist that consumers need those services. In their minds, certain states are doing a disservice to their residents by preventing access. However, these laws were revisited and re-tightened after strong consumer demand. North Carolina was the first state to re-ban cash advance companies after allowing them to operate. Consumers in Arizona and Montana eventually re-criminalized short-term, high interest loans by way of public vote. The majority of voters agreed that the risks and harm done by payday loan companies outweigh any perceived benefit.
There are benefits to local businesses as well. In states where payday loan companies are essentially prohibited from operating, consumers looking for alternatives to banks will find credit unions and other small businesses. Studies have found that the total amount of money consumers saved in each of those states surpassed three and a half billion dollars. That’s three and a half billion dollars available for local spending, rather than repayments made to big corporations. The cycle of borrowing and re-borrowing can have negative implications to other service providers and companies as well, with the debtor being stretched too thin to make all his or her payments.
5Even Borrowers Are Against Them
There are huge financial risks involved in obtaining payday loans. The National Consumer Law Center found that getting just one payday loan can dramatically increase the borrower’s risk for losing his or her bank account, beginning the bankruptcy process, and face massive amounts of credit card debt. Many industry lobbyists insist that those risks are minimal and that the benefits of obtaining short-term loans greatly outweigh any perceived detriment.
A recent study conducted by the Southern Bancorp Community Partners contradicts that point of view. Their study found that those who had used, and presumably benefited from, the services of cash advance locations were supportive of a ban. These individuals, many of who are still in some financial need, overwhelmingly agree that they are “better off” after these types of companies shut down. The departure of the industry in those states didn’t remove the need for short term, emergency loans. There does need to be a solution available to people in that situation, but payday loans are not a sustainable one. In states where quick cash advances are not available, the majority of consumers report being able to find a safer borrowing method.
Former borrowers agree that they were targeted by a very specific style of advertising and customer service. Much the same way ACE trained its staff to lead consumers “into a debt trap,” consumers find that most cash advance places use these practices to a certain degree. As a result, there is a need for tougher legislation and stricter consumer protection policies in states where payday loans are allowed to operate. In others, these regulations need to remain tight in order to prevent usurious companies from entering the state.
4Hidden Fees And High Interest Rates Are Constants
Payday loan companies charge some of the highest interest rates of any lender in the market. They are able to get away with this because they often lend to high-risk borrowers, who don’t necessarily consider those high interest rates as “interest”. Instead, they often consider it the small cost of borrowing. If borrowers use cash advances as they are intended, those high interest rates are rarely discussed in terms of percentages, which can range from twenty-five percent to nearly one thousand percent. Employees will often give a dollar value instead, making it seem less shocking to the borrower. For example, twenty-five dollars sounds a lot better than nine hundred and eleven percent.
This practices puts the consumer at a considerable disadvantage. While many might not blink at the high interest rates, convinced this was the best way to get the money they need, others would likely have a few questions. By disguising these high rates, payday loan companies can easily charge incredibly high rates without arising concern.
The fees charged are also very high, and not all of them are disclosed at the outset. For example, some cash advance locations will charge a certain dollar amount per hundred dollars on loan, and then double it on every hundred thereafter. There may also be high fees associated with re-borrowing. In some cases, these fees may even compound each time a sum is borrowed. While there is nothing explicitly illegal with this in practice, cash advance companies do not inform their customer that the rates increase, leaving them to wonder how they racked up such a high loan.
3Aggressive Collection Techniques
In their commercials, most payday loan companies portray themselves as friendly businesses, just there to help out people in need of a few dollars. They also play up their willingness to make alternate payment arrangements with those who cannot make their full repayments. For the most part this is true, until the borrower can no longer re-borrow or make satisfactory payments. Once payday loan companies are no longer receiving monthly payments, their collection strategies can get downright aggressive.
A number of different organizations and news outlets, including CBS and CNBC, have catalogued the various approaches commonly used. These investigations found that payday lenders often had borrowers sign documentation allowing them to garnish wages. In other cases borrowers were subjected to exorbitant fees and even higher interest rates with each re-loan. If these attempts at collection fail, payday loan companies do not wait long before selling the debt to a collection agency. Once the borrower’s debt is in the hands of a collection agency, he or she may be subject to additional fees and interest. Collection agencies can repossess vehicles, ruin your credit rating, and even garnish your wages.
One company in particular, CashCall, Inc., was fined in 2013 over what the Attorney General called “abusive collection practices.” These techniques are not unique to CashCall. Former borrowers often have similar stories about the strategies used by debt collectors working on behalf of payday loan companies. These practices often include calling the borrower constantly, regardless of the time of day or night and illegally threatening jail time for non-payment. One of the more vicious collection procedure used was to call friends, family, co-workers, and even employers and disclose confidential information about the nature of the debt.
2Payday Loans Are Often Misused
Payday loans are often touted as a way to make ends meet between paychecks when an emergency expense arises. Commercials and other forms of advertisement often depict things like unexpected medical situations, veterinary bills, or vehicle repairs as reasons to seek out a payday loan. The reality is that most Americans wind up using payday loans to cover day to day expenses. One study done by Pew Trusts found that only sixteen percent of people used a payday loan to cover an extraordinary expense. The vast majority took out loans to cover regular, anticipated expense like utilities bills, credit card costs, or to buy groceries. In addition, the majority of people who take out payday loans fail to repay them in full when they are initially due, often re-borrowing up to eight times.
To further highlight the point that payday loans are often misused, that same study asked current borrowers what steps they would have taken if payday loans weren’t available. Over eight percent of respondents had a back up plan, such as selling possessions or borrowing from a friend, that would cost them less in the long run that obtaining a loan.
Research has indicated that payday loans are rarely used as intended, and that they are unnecessary in the vast majority of cases. As with other things that are touted as being good for the population, like certain forms of medication, if payday loans and short-term cash advances are being chronically misused, intervention is needed to fix this societal problem.
1Payday Loans Are Popular
Despite the numerous drawbacks to receiving a payday loan, the industry is booming. Right now it’s a nine billion dollar industry, with more payday loan outlets across American than McDonald’s locations. These numbers are true across the United States, despite payday loans being banned in fourteen of them. Payday loans are a very powerful industry, but they do not need to be.
Proponents of the industry use the argument that payday loans are necessary as a way to keep them in business in as many states as possible. Industry supporters often insist that banning payday loans would punish those who live paycheck to paycheck, and rob them of their ability to pay for extraordinary and unanticipated expenses. As repeated studies have indicated, however, payday loans aren’t as essential to the lives of the economically disadvantaged as lobbyists would have you believe. Former borrowers admit that the primary reason they sought a loan to begin with was the ease with which the loan can be obtained. In states where payday loans are banned, borrowers have found other ways to meet their short-term financial needs. These routes often include borrowing from friends and family, pawning items, or searching for odd jobs – the very same routes often taken when people are struggling to repay their payday cash advance.
The obvious conclusion is that payday loans are not a necessary evil. Banning them will not further subject the economically disadvantaged to further financial hardship. In fact, in many cases, it can improve their overall financial situation. Borrowers and economic experts alike agree that removing the temptation to seek these types of predatory prevents people from falling into a cycle of debt.
For these reasons, and so many more, it’s hard to believe that payday loan companies are still given the type of free reign in the market as they are in many states. The biggest market for payday loan companies tends to be those who live at or below the poverty line, the elderly, and military veterans. Preventing these companies from preying upon those valued members of society should be instinctual for many politicians.
Still, payday loan companies are a ubiquitous presence in those states without prohibitive legislation. They’re also constantly featured in television and radio advertisements as an attractive and easy way to get a few extra dollars. The fees, interest rates, and re-borrowing premiums are not usually mentioned in these marketing spots. Leaving consumers in the dark about the potential risks, and encouraging them to re-borrow each and every time a payment comes due have contributed to their popularity and success in today’s cash-strapped society.
Despite their popularity, payday loans are bad for borrowers, and bad for communities. There is almost endless financial harm a cash advance can cause, and very little benefit to seeing one out. The payday loan industry as a whole has resisted tight regulation in the past, with measures failing by an overwhelming margin in states such as Texas. However, bans have been effective across the country, with very little impact to those who would normally be borrowers. Resistance to state level bans tends to be strongest among those who have an interest in the industry continuing to thrive. This makes the necessity of such bans all that stronger. Effecting a ban on payday loans would ultimately prevent predatory lenders from targeting vulnerable members of our society.