Pay-day lenders are exploitative.  But does the government really help things by “reining in” these lenders, so that the Mafia becomes the only source of borrowed funds for the poor &/or prodigal?

My spouse for several years worked for the state government office responsible for regulating money lending institutions - including payday loan businesses. Do people understand what the effective annual interest rates is on such loans? (People are not alarmed by say 3% per month - but how much is that per year? and would they tolerate such rates if they were expressed that way?) And - dare I bring it up? - the effective annual interest rate on a host of other loans… such as “early tax rebate” loans?

In graduate school I wrote a research paper on debt/loan patterns in the ancient Near East (specifically the ancient city of Nuzi - about 14-15th centuries B.C.E.) for a course on ancient agriculture. One of my (unlooked for) conclusions was that some people clearly got into never-ending cycles of debt. They borrow money (grain/oil) from someone (often a fellow named Zi-ke)... the next year take out another when they have not paid back the first one… with interest rates that would make payday loan businesses blush… I found one could often trace individuals and their levels/cycles of debt worsening year after year. Truly amazing.

Sometimes the problem is a lack of education for those that get caught in this trap, and sometimes the problem is a lack of discipline. 

But sometimes getting a pay-day loan is a rational decision.  If you need $500 to get your car fixed, so you can commute to your minimum-wage job, maybe 3% per month is worth it for a short time.  And if the nanny-state says, sorry, you can’t borrow any more, our rules say you’re maxed-out, what do you do?  Borrow from Guido at 10% a week.  In such cases, well-meant legislation actually hurts the poor.

While many people are not a huge fan of payday loans, I also know that many people used it when need arises. The state legislature is weighing House Bill 1421, which would first establish that fees charged on faxless payday loans couldn’t be legally deemed interest.  The bill would also cap the number of renewals and the amount of money that can be lent by payday loan outlets.  Another provision of the bill makes waiting a few days between payday loans mandatory.  HB 1421 contains a lot of provisions that would prove beneficial for both the lenders and the consumers of payday loans.  To read more about HB 1421 and payday loans head over to the Money Blog.

Payday loans should be regulated somehow, there’s no doubt about it.  It’s hard, though, when Senator Bob Corker, in exchange for generous donations from his cronies in the payday industry, lobbies for crooks like W. Allan Jones of Check Into Cash.  Even worse, check out this link:

http://garyrivlin.com/2010/06/pioneers-of-subprime-allan-jones-and-the-payday-loan/

Disgusting but true.