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Do you know anything about the history of payday loans? What could have motivated someone to offer such a thing? To find that out, we’d only have to look at fairly recent history – payday loans haven’t been around very long.

But one thing payday loans have been is controversial. We’d like to present both sides of this controversy, as a way of examining their history. We’re going to do this in simple terms, giving each party their turn to state their cases. Sit back and get ready. You may want to get some popcorn – this could become quite a battle!
Why were payday loans created?

A payday loan is a short-term, high interest loan, designed as a last resort for those finding themselves in financial dire straits. For a more detailed look at these loans, see our report on How Payday Loans Work.

Briefly, we’ll tell you here that the borrower writes a post-dated check to the payday lending company, for which they receive cash, minus the lending fees. And it’s the lending fees that have brought this system into government debates and have provided an active forum for the media.

So payday loans and cash advances are a pretty volatile subject these days – and have been since their inception. Mention them to some people, and they may just blow up at you. Others may see no harm in them, while still others may sing praises of them.

As with any kind of financial service, payday loans are government-regulated, with specific guidelines as to what extent they can go in providing this service. There are many consumer advocate groups who’d love to just shut down the whole industry. But the members of this industry say they’re not breaking any laws.

We’re going to present the points of both sides here, and you can gather the facts and decide for yourself which side you agree with. Either way, you’ll have people who’ll agree with you. So here’s the argument, and the justification.

Argument: Consumers Union is one of the leading consumer advocacy groups in the United States. Their name will come up repeatedly in the quest against payday loans. Let’s hear from their Southwest Regional Office, and the senior staff attorney, Rob Schneider: “Payday lending across the nation is rife with abuse. These high-cost loans often lead consumers down the path to bankruptcy.”

In testimony before the Finance Commission, Consumers Union asked for changes to ease the strain on helpless consumers, especially the length of the term for the loan, thus lowering interest rates. “We are disappointed the Finance Commission chose to move forward with a loan term of 7 days,” continued Schneider. “Such a short term pushes up APRs as high as 570%. Authorizing interest rates that high is unconscionable and unprecedented in Texas.”

That’s a pretty passionate view from the consumer advocate’s side. They’re saying that borrowers end up paying very high interest rates. Schneider concluded with this statement: “We urge the state’s top financial regulators to limit the harmful effects these loans have on consumers by changing the rules before they are adopted. These rules set precedent in Texas, and should be as fair to the consumer as possible.” Consumers Union’s regional offices are pushing state lawmakers for better legislation.

Justification: Answering the claims of consumer advocates, payday lenders say their quick cash payday loans are designed for one-time emergencies, providing fast cash through a simple procedure, to people who don’t have the time or a good credit rating or credit history to deal with banks. They argue that their high fees offset debts that are written off. For example, a North Carolina government report shows that over 25% of check assets held by payday lenders in the state were in the form of bounced checks. The high costs are charged to help recover those losses.

Argument: The costs to borrowers become extremely prohibitive as borrowers extend, or “rollover”, their payday loans. Arizona state law has a maximum chargeable APR of 36%, but the payday lending industry uses loopholes that allow it to charge APRs of 500% or higher.

Arizona District 25 state Rep. Manuel Alvarez says, “I won’t say payday lenders are directly targeting a certain demographic, but they are making it much easier for low-paid people to get into debt they can’t handle.” Alvarez was referring to the high number of seniors “caught in the trap” of rolled-over payday loans. He also says that the rise in the state’s bankruptcy rate from 2000-2003 is partly due to payday loan customers not paying off their loans in the first 2 weeks. Alvarez is pushing a bill that would eliminate rollovers.

Also, an Indiana study of payday lenders showed that 91% of borrowers renewed loans at an average of 10 times per customer. They say the high fees force borrowers to renew their loans.

Justification: Jonathon Paton, an Arizona spokesman for the Community Financial Services Association, a payday lending industry group, said his members strictly adhere to state lending laws. And as far as seniors go, Paton said they couldn’t possibly just stop lending to seniors on fixed incomes – that would be discrimination. Paton puts it like this: "What are we supposed to do, tell people: ‘We can’t give you a loan because you’re too old’"?

Argument: A consumer advocate group called Southwest Center for Economic Integrity, headed by Karin Uhlick, executive director, says "83% of payday loan locations are within a ¼ mile of high-medium stress areas, compared to credit unions at 69% and banks at 56%. And 67% of payday-loan locations are within ¼ mile of high-poverty areas, compared to credit unions at 51% and banks at 34%". Uhlick says they’re also targeting seniors on Social Security, and the working poor.

Justification: Jonathon Paton says the industry provides an important avenue for those who suddenly find themselves in a financial crunch. He said it’s actually check-cashing outlets that are in the lower-income areas, not payday lending centers. He also points out that borrowers don’t need a regular source of income, or a bank account to cash a check, both of which are requirements for a payday loan.

Spokesmen for the industry also remind consumer advocates that mergers and acquisitions led to the closing of many small bank branches – banking services weren’t as accessible. They add that large financial institutions aren’t interested in $100-$500 non-secured loans. Payday lenders have stepped up to fill that financial services void.

Ward 5 Councilman Steve Leal notes that, “When banks and credit unions moved out, non-traditional services moved in to respond to this niche market. But I don’t believe these folks are guilty of violating predatory-lending laws.”

The payday lending industry also points out that there was a lawsuit against Wells Fargo bank for “clearing” a customer’s biggest check first, so others bounced, thus allowing multiple NSF fees. Consumers wanted to deal with smaller financial service companies that followed better business practices.

Argument: Consumer advocates say payday lending companies make millions of dollars from the lowest-income people.

Justification: “We’re always concerned with lending practices that impact vulnerable citizens,” says Robert Zunoff, assistant state attorney in the Consumer Protection and Advocacy section. “They’re not doing anything illegal, as far as I know.”

John Martinez, of South Tucson, is a frequent payday loan customer. He says, “Banks always want some kind of collateral or real good credit. (Payday lending) is a nice commodity for the community. You may have to pay $45 for $300, but that’s not too bad. And the service is helpful as long as you’re conscientious about paying it back.”

Some people need small, fast, no-hassle loans to pay for surprises like car repairs, or for rent, phone or utility bills, etc., and payday lenders say they meet that need.

Bruce Tunell, Deputy Superintendent of the Arizona State Banking Department that regulates payday lenders, says “It’s unlikely that payday lenders are targeting low-income people, because the usage of the payday loan cuts across the economic spectrum.”

Argument: On March 25, 2000, the Federal Reserve in the U.S. ruled that payday lenders must disclose, in writing, the APR on loans. They believe that payday lenders were deceptive in the information they disclosed to their customers. They feel that if borrowers had a clearer picture of what they were getting into, they wouldn’t renew, or rollover, their loans so many times.

Justification: Nicholas Boehler, manager of Advance America in Tucson, says his company charges an APR of 391.07%, but doesn’t count on rollovers for profit. “Our loans are meant to be a short-term solution to an immediate problem,” Boehler said. “We’ve had thousands of customers use our service since we opened in 2000. Of those, only about 400 or so are active customers. Most people pay their loans and we never see them again.”

Argument: California government is trying to legislate a bill, giving consumers longer periods to repay loans, and requiring more information disclosure. They’d also like the Justice Department to regulate the payday lending industry, including licensing, bonding, record-keeping and reporting.

Meanwhile, in Texas, lenders are reportedly disguising loans in many ways; for example, they were saying that customers were buying personal ads, not getting loans. The State of Texas has sued many lenders.

Lenders are accused of always looking for loopholes. For example, they’re forming associations with banks to take themselves out of the jurisdiction of payday lenders. All these things add up to Consumers Union’s reason for urging the federal government to make it illegal for banks to make short-term, high-interest payday loans.

Justification: Obviously, not all state governments are against payday loans. For instance, California, in July 1996, authorized payday loans, recognizing them as “secure, small emergency loans without the red tape.”

Customers agree that the fees they have to pay for the loans are worth it, because where else can they get a loan, up to $500, without a credit check, without involving their credit report, without collateral, and have their money automatically deposited into their bank account with 24 hours. When they have a financial emergency, they need the money NOW! Payday loans give them just that.

Argument: The U.S. government recently formed the Center for Responsible Lending, an organization designed to stop consumers making unwise choices regarding their finances. They particularly focus on what they refer to as the “unbanked”, made up of primarily the poor (51% earn under $10,000 a year), and ethnic minorities (53% are Black or Hispanic). The unbanked aren’t able, for a variety of reasons, to participate in the financial mainstream. The payday lending industry are accused of preying on the unbanked. The Center for Responsible Lending is trying to push the unbanked back into the financial mainstream.

Justification: Borrowers examine their situation and weigh the options, considering price, convenience and urgency. For example, they might think, “What’s more valuable to me: $250 today, or $300 in 30 days?” Payday loans provide immediate assistance. The fees are worth the convenience.

Argument: Julian Bond, Chairman of the Board of the National Association for the Advancement of Colored People (NAACP), says, “Visits to payday lending stores, which open their doors in low-income neighbourhoods at a rate equal to Starbucks openings in affluent ones, are threatening the livelihoods of hard-working families and stripping equity from entire communities. The NAACP is dedicated to eliminating payday (lending), because wealth-building and saving for the future are vital to the economic success of communities of color.”

Justification: Many believe that the government are over-regulating the payday lending industry. They say that if the government steps aside, a free market will continue to reach out and draw the unbanked into the financial mainstream. They consider themselves a valuable part of that market.

Payday lenders say the alternative they offer to people in need of immediate cash advances, is far better than entering the underground market, such as loan sharks. After all, if they can’t make their payments, at least they can declare bankruptcy, instead of having their legs broken – or worse.

Conclusion for the argument against payday lenders: Payday lenders are gouging consumers with high-interest loans, preying on people who have little income to begin with. Their interest rates and fees are exorbitantly high and force borrowers into repeated rollovers. Their business practices are suspect at best and they should be totally outlawed.

Conclusion for the justification for payday lenders: Payday lenders offer quick, simple loans to people who find themselves in unexpected financial emergencies. They’re providing a much-needed service for the unbanked population, who are outcast from the financial mainstream because of low income and/or poor credit history. Payday loans help to protect people’s credit history when funds are short. Lenders are providing a necessary service to those in need, and operate within the limits of the law.
You have the facts – it’s your call

So there are some of the arguments and the subsequent justifications of both sides. Many voices are speaking out throughout America. Are payday loans a good thing? Or are they just taking advantage of people with no alternatives? You need to decide that for yourself. But whatever your decision, you’ll have a good idea of the history of payday loans and how it relates to the position of the industry today. And if you’re ever in a position where you need a payday loan, you’ll have the knowledge with which to base your decision. Good luck!