Payday loans have been a hot topic in America over the last decade, with a growing number of fraudulent businesses illegally operating under the protection afforded by tribal Native American lands and unregulated states. That has given the industry as a whole a relatively negative reputation, but the fact of the matter is, more than 5% of the population in America has used payday loans, and regulated companies are far from stereotype that sensationalist journalism would have you believe.
According to the Pew Charitable Trust, 8% of renters with an income between $40,000 and $100,000 have used payday loans. With poverty-level income in America well below the $40,000 mark, these are not impoverished people desperately seeking money. Instead, they are middle-income Americans looking for short-term finance options. That raises the question of why someone in this income category with access to other finance options would choose to use a payday loan. The answers may surprise you.
First, it’s big business for the states. Anything regulated can be taxed, and the majority of states both regulate and tax the industry. This regulation means that the outlandish stories you may have read are simply not accurate. State laws limit the term and finance fees associated with these types of loans (see the previous link). This protects consumers, and allows states to collect their taxes.
Second, the average person who has used payday loans doesn’t have problems paying them off. Rates are generally about $15 per $100 borrowed, and the average loan amount doesn’t typically exceed $400. Most people end up paying $50 in finance fees on a loan, and never go back to the loan office again. For many this is preferable to using a pawnbroker to haggle over the value of their personal goods, or weathering the scorn of someone they know when asking to borrow money. Those who frequently use payday loans are the exception and not the rule.
Third, the number of internet services providing payday loans has increased with demand. Being online has allowed SEM and SEO to marry up with analytics, allowing a number of these providers to offer loans based on an aggregate of the most popular cities. Being online does not exempt them from state regulation, so they are still taxed and monitored. Everything is done through legitimate bank channels, and the fees are no different than walking into a traditional loan store. That said, not every service is the same, and not all of them operate within the law. This is largely what contributes to the negative media portrayal of the industry.
This negative reporting is typically not the result of widespread abuse or factual information, but rather due to consumers who are not aware of their rights and the protections their state may offer. Despite that, biased reporting continues, but it does not go unanswered. For example, in a response to the New York Times by the Community Financial Services of America, payday loans are described as a regulated choice made by informed consumers. But who are these informed consumers, and are they by common consensus actually informed, or victims of predatory lending practices, as sensationalist reporters and the New York Times would imply?
The truth is that regulated payday lenders operate within the constraints of the law that governs their states. They provide tax revenue, create jobs, and offer consumers short-term financial solutions. Their services can help a person meet unexpected expenses, but the regulations governing lenders vary from state to state, and should always be consulted before considering a loan. Considering this, one has to wonder why major news outlets would report so negatively on the industry.
That has to do with sensationalist journalism incorrectly labeling illegal loan sharks as payday lenders in order to attract readers. The fact of the matter is that businesses operating in violation of state laws are criminal, and no different than a mafia organization. Calling themselves payday lenders no more makes them a regulated business than a drug cartel labeling themselves as pharmacists and offering to fill discount prescriptions.
The overwhelming majority of stories covering consumers buried in debt from payday loans are factually inaccurate. Almost every one of them involves a consumer who obtained an illegal and unregulated loan from a criminal organization operating outside the jurisdiction of their home state. These stories intentionally mislabel criminal organizations as payday lenders to attract readers, which is just bad journalism. That’s not to endorse payday loans, pawn shops, or rent-to-own companies, but rather to point out that the monster you read about isn’t quite as scary or unregulated as it seems.
There are constitutional precedents governing states’ rights, which also deal with payday lending and the associated federal regulations. These matters are complex, and often difficult to interpret. If you or someone you know is interested in a payday loan, just make sure you’re dealing with a regulated business licensed to operate in your state, and consider all the financial alternatives before proceeding. Most importantly, check the facts, especially if you’re writing a story.