The cash advance loan industry is successful and is expanding more quickly than anyone could have predicted a number of years ago. There are now more cash advance loan stores nationwide than there are McDonald’s, Burger King and Subway restaurants put together. That is a lot of stores. And the industry has come under a lot of fire recently because the rates of interest charged for cash advance loans are at best usurious and at worst, predatory. There is not much else that can be used to explain interest rates that usually exceed 400% per year.
The business defends its position, pointing out that A) they are selling convenience and B) the interest rates they charge aren’t actually interest, they are fees and C) the loans are for periods of two weeks, not a year, so the annual interest rate is moot. These arguments can be debated endlessly, but the loans continue to be popular despite laws that require that the lender divulge all of the terms in writing. The one thing that the lenders claim that probably does not hold water is the assertion that their typical customer is not poor, but rather a member of the middle class who just borrows from them because it's convenient.
Research suggests otherwise. A recent study conducted in Arkansas paints a markedly different picture from the positive one recommended by the cash advance loan business:
According to the survey, half of the respondents said that they applied for a bank loan before obtaining a payday loan but were turned down due to a history of bad credit.
More than three quarters of borrowers did so because they were getting threatening calls from creditors to whom they owe money.
Two thirds of respondents said they took out a payday loan because they just had no choice.
This clearly suggests that the main recipients of these quick cash loans are indeed the operating poor. Not only that, but they don’t take out these loans because they are handy, but because they are literally the only chance to borrow cash to pay bills or survive until the next paycheck. It’s a pretty sad circumstance when the only available source a few people have to borrow money is one that charges a minimum of 400% per year.
The market continues to determine whether or not these business will keep operating. After all, if no one wanted these products, no one would purchase them. In the meantime, legislators in a lot of states continue to try to find alternatives that will allow these taxpaying businesses to stay while protecting the consumers who obviously have no other place to turn. There is no simple answer, as the legislators in South Dakota have found. They set up loose banking laws to bring banks to the state, only to see payday cash advance stores pop up on every street corner. Clearly, loose banking regulation is a double edged sword.
