Payday Loans and Unintended Consequences to Regulation

By | Dec 3, 2008

There is a well written and fairly balanced discussion of the Iowa payday loan industry written by Alec Schierenbeck of The Iowa Independent. In addition to Iowa, it highlights many of the issues faced by regulators of the Payday Loan Industry

Attempts to regulate the payday loan industry out of existence at the expense of consumers with a real need for small, noncollateralized loans must be balanced or unintended consequences will result. Comments by so-called consumer protectionists to ban the payday loan product or reduce the interest rates to an unsustainable rate (ie:36% APR) and thus “force these consumers to go to family and friends for a small loan to fix the car to get to work or to feed the kids is not an option. These “protectionists” need to spend an hour on the phone in a payday loan store where they’ll discover it’s often the family members of those in need who are calling us to inquire about a loan! The family doesn’t want to loan the payday loan consumer any more money because THEY NEVER GET PAID BACK!

For a taste of this payday loan article:

“And as policymakers attempt to clean up the nation’s credit mess, they will confront many of the same questions raised by the explosive growth of payday lending. At what point is an interest rate too high? When is a convenient loan too convenient? And how should governments balance regulation with respect for private enterprise and individual choice?

While the industry continues to grow at breakneck speed in many parts of the country, six states and the District of Columbia have decided that payday lending goes too far. Just this year, Ohio became the most recent state to pass legislation effectively eliminating the loans by imposing a cap on interest rates of 28 percent. At that rate, say payday lenders, their businesses have no choice but to close.

‘They’ve saved my life’

But Tammy, a mother and part-time employee at a nursing home in Newton, Iowa, believes that an Iowa ban on payday loans would be a disaster. “They’ve saved my life quite a few times,” she said on a recent afternoon, as she stood in the parking lot of a Newton strip mall after paying off a loan for $125 along with its finance charge of $19.44, which amounted to a 405.46 percent annual interest rate.

She accepts the steep finance charges because, for people like Tammy and her husband, there aren’t many other options. For those who have already exhausted their credit cards, it’s difficult to find another way to borrow money in the short term. And traditional banks, even for customers with stellar credit, rarely deal in loans as small as Tammy takes out on a regular basis.

As she reflected, “There have been times when I had to come here just to get food to feed my family.”

More on payday loan laws and legislation can be found here: www.Payday Loan

2 Comments so far
  1. Picky Boot December 9, 2008 3:28 am

    Alec nice one, it is really interesting. First of all before going for the payday loan one must make sure that it is a short term loan. The interest is high because, the lender is taking a risk and lends the amount within few hours of registration. Not only Tammy was secured by the payday loan, most of them saved themselves from dangerous situation.

  2. iowapaydayoperator January 5, 2009 7:23 pm

    Some Iowa legislators are proposing a rate cap. Needless to say if they are successful they will only hurt the state further. The state is already in a budget deficit and will lose further revenue by shutting down paydaylenders who pay thousands each year in auditing and licensing fees. More government brilliance.

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