Payday Lenders, Though Flawed, Have a Place

In California’s most blighted neighborhoods, so-called payday lenders promising quick and easy cash have replaced liquor stores and bail bondsmen as the modern symbols of blight. Payday lenders deal with a growing number of consumers who have few other financial options, offering them short-term loans at extremely high interest rates.

Most critics insist that this practice, though legal, is just loan-sharking. But we should pause before we rush to limit consumers’ credit choices. Payday lenders are the sole providers for small, short-term, unsecured loans that can be obtained with no credit check.

If payday lenders were willing to modestly regulate their own industry, they could join the ranks of mainstream creditors and provide a first step toward credit-worthiness for some consumers.

Payday lenders give cash to people who deposit with them personal checks ranging from $100 to $300, which is the legal limit. These personal checks are for the loaned amount, plus a fee. Lenders agree not to cash the checks until a borrower’s next payday. According to Consumers’ Union, fees for $100 payday loans can range up to $17.50--more than 450% on an annual basis for a two-week loan and twice that for a one-week loan. That is a heavy charge, though the risks and expenses of making such small, unsecured loans are great.

Since payday loans were first authorized six years ago in California, there have been numerous attempts by the state to rein them in. One strict bill failed last year in the state Assembly. But there will be other attempts at regulation. Payday lenders have the chance to improve their practices before heavy regulations are imposed on them.

The fundamental premise of payday loans--often used for necessary expenses such as automobile repairs--is not bad. It’s the absence of consumer-oriented lending standards and practices that imperil borrowers who get in over their heads with repeated, costly loans.

The acquisition of check cashing/payday lending outlets by more credible financial institutions like Union Bank of California, which now owns the Nix lending chain, is a step in the right direction. The bank-owned payday lenders bring ATMs and other regular banking services, like checking accounts, back into low-income communities. Other benefits include allowing residents to store money safely, which deters crime.

Yet fixes are needed, such as restricting the number of loans consumers can take, allowing the repayment of debt in installments at reasonable interest rates and making sure borrowers clearly understand the terms of payday loans. Payday lenders might also link up with nonprofit credit counseling agencies to provide immediate help to payday loan customers who show signs of getting into trouble.

There has been one step in this direction: A payday lending trade group, the California Financial Service Providers, has agreed to accept debt management plans worked out with borrowers by credit counseling agencies. The group could help manage the industry’s risk as well as help consumers dig out of excessive debt.

Payday lenders must recognize that in the long run they won’t avoid excessive government regulation unless they better protect consumers.