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The argument in favor of payday lending

A sign for a payday lender.

Payday lending has become common in the U.S., but it's attracted harsh criticism from many. And it's been banned or regulated out of existence in some states. But banning payday lending actually does more harm than good by restricting credit options for households with no other recourse for loans.

Critics object that fees for payday loans, typically $25 per transaction, are excessive. And sure if you expressed that $25 as an annualized interest rate for a two-week $200 loan, the interest rate would be in the triple digits. But the fee is the risk premium the lender charges to provide loans to people who usually have poor credit. And borrowers don't look at the fee as an interest rate any way. They recognize that $25 is much less than bank overdraft charges, late fees and disconnect penalties from utilities.

Critics also allege that payday loans trap borrowers in debt, sometimes taking months to repay and leading to a cascade of fees. While some payday borrowers do take longer to pay off their loan, this criticism confuses cause and effect. Belated repayment is almost always caused by unexpected financial emergencies, like surprise medical bills or car repairs. Borrowers pay additional fees to extend the payday loan until they can pay the balance. Borrowers and the lenders see an extension as the best alternative in those situations.

Let's be clear. Those of us outside the industry who defend payday lending are not apologists for payday lenders or for the choices made by their customers. We are, instead, defending the right of individuals to make voluntary choices in the marketplace given their unique situation. The defenders of payday lending argue that financial resources are more productively employed when they are allocated by the voluntary forces of supply and demand. Critics of payday lending mostly reject market verdicts.

The best way to help cash-constrained households during times of financial emergency is to give them as many choices as possible. You do not help marginal borrowers by laying out their available options and then eliminating by regulation the one they actually choose.

About the author

Tom Lehman is a professor of economics at Indiana Wesleyan University.
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I for one am against payday loans because it is very costly and hurts the lower income earners who are forced to use these loans. There really should be a better option out there for people who need the short term loans to make ends meet.
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I think it's interesting that there are people here who believe that the word "choice" is a bad thing. Somehow, these people believe that other people should not be allowed to have a choice because "it's for their own good". But there's no logic to this practice.

If someone is going to make a mistake, the only way to learn is to make that mistake.

With Payday loans, we have a product that's been around since 1990. If people were so very stupid to use payday loans, then they would use them once, get screwed and never use them again. It is not human nature to repeat mistakes, and those that cost money -- especially for those short on money to begin with -- are certainly never repeated

And yet, people use these loans again and again -- not because they are stupid -- but because they are helped. And they choose these loans over all other forms of short term credit over and over again.

Are we to believe these people are brain-dead? That's what some commenters want us to believe.

The drug use analogy is a false analogy. Drugs are proven to have a terrible effect on people and they are addictive.

Short term credit is proven to help people (and proven, when the choice is removed, to hurt them), and not addictive.

Leave people alone. They can manage their own affairs and do not need busybodies telling them what they can't do.

I examine many of these issue at the only nonpartisan blog on the internet about payday loans. Please come visit.

Http://www.paydayloanfacts.org

Markets work best when they are open to new ideas, not when they are shuttered by regulation. There is obviously a huge demand from people who need credit that have the least access to it. I hate to sound so Republican, but the more small loans like these are regulated, the less likely any innovation will occur to serve that demand.

After multiple attempts of getting a small loan our bank was going to charge us outrageous interest whereas cashloancity.com had a small fee on borrowing $400 and we paid it back when we could no problem! I realize that not all cash loan sites are equal but why the scrutiny? Our credit card charged us $40 for being one day late 2 months ago which put us over the limit and they charged us $40 for that too, but that's alright for them to do?

Try to prove me wrong , but I am strongly confident that payday lenders are not the one who drag people into debt. I think that customers are the one who drag themselves into debt. If someone is irresponsible with their finances, it is always easy to blame expensive services. Why do you all ( well a lot for sure) use payday loans if you fail to make payments? Why are you complaining about interest rate after you fail to amke payments in time? You have to read the agreement before you sing anything or submit online. Come one, look in the mirrior and start being honest with yourself.
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'More choices' could also include selling one's services as a hit-man, one's kidney[s], or oneself entire into debt-slavery. Those who want such to be considered permissible are free to move to or build Sealand, Minerva, or Andrew Ryan's Rapture.

The Culture I want to build (dog-whistle to I.M. Banks fans) will at worst not give certain choices sanction by protecting contracts enforcing them, assets gained from from them, or give the enormous benefit of limited liability from those battening from them, and at best make other choices easier. Yes, this is a public imposition of a sort of morality, but so are laws against theft (at least as practised by the non-rich) and murder, and is comparable to them, as opposed to the silly, sex-obsessed morality (really just tribal purity- and female property codes dressed up as morals) that continues to give the notion a bad name.

Every time we say, 'It is not right that such and so be allowed to happen in our great land/county/house,' we vote against the blind worship of the Market, for which everything is permissible and nothing is true. The utilitarian, observation-based, hedonic/anti-suffering, morality approved of by our better Founders is a reasonable and better, and secular foundation.

And even were theory to prove, in an idealised market populated by H. economicus (hat-tip to Willy), that allowing such loans in their lightly-regulated state were in fact more humane by the lights of that good moral system mentioned above, the model is not necessarily stable against the perturbations of the real world...and half of rural India are in thrall to lenders, often losing their land, sometimes prostituting their daughters, and occasionally killing themselves in despair. 'By their fruits....'---and if the fruits of pay-day lending had proved sweet, no-one would have thought to interfere there.

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