A sign for a payday lender.
A sign for a payday lender. - 
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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.

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