Despite the many benefits that they pose to those who use them, payday loans have been outlawed in fifteen states – Arizona, Arkansas, California, Connecticut, Georgia, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, Ohio, Pennsylvania and West Virginia – as well as in the District of Columbia. New York in particular expressly prohibits making such loans over the Internet as well as in person. Many other states, are taking steps towards abolishing payday loans (as are Quebec and Newfoundland in Canada), and some people, including myself, think that the federal government should do so as well.
What is a payday loan?
A payday loan, also known as a payday advance, is an unsecured loan that depends on the borrower’s employment as well as on his or her credit history. Basically, it is meant to be paid back on the next payday of the borrower, who writes the lender a postdated check for the full amount of the loan plus any fees involved.
Why do people resort to them?
Generally, people who take out payday loans are low-income individuals. At least in Illinois, a majority make less than $30,000 yearly. Some people go for the payday loan option because it seems to be the only one feasible for them. Others perceive them to be a reasonable “stop-gap.” The most attractive thing about payday advances is that borrowers can generally give a reasonable estimate of how much their next paychecks will be and hence gauge their ability to pay back what they owe.
Why are they illegal?
Payday loans have been outlawed in many jurisdictions for several reasons. One is that they drain money from low-income communities. As mentioned above, the typical borrowers are low-income workers who cannot secure forms of credit that charge less interest. Higher interest rates have the effect of impoverishing them. The aggressive practices of many lenders when collecting their dues are also cause for concern. Sometimes the borrower’s payday check bounces, in which cases the lender threatens to haul him or her into court for check fraud. They may also choose to outsource the debts or sell them to a third party.
Regulations of payday loans
In spite of what critics say about payday loans, they have their defenders. One industry expert wrote a letter to the editor of Philly in which he stated that consumers do better when they have the payday loan option available to them. In almost every jurisdiction in which payday loans are legal, they are subject to certain restrictions. In New Mexico, for instance, there are caps in force on the total number of payday advances that can be procured by a single individual. As of November 1, 2007, the consumer is also barred from taking out a new payday loan in order to pay off an existing one (“rolling over,” as it is called). In addition, the borrower has to wait ten days between the time he or she pays off one loan and the time he can qualify for a new one. Interest rates in excess of a certain APR are also illegal in most of the states. Although some states have taken the steps to make payday loans illegal, I think it’s time for the federal government to do the same. Payday loans are designed for one purpose: to swindle desperate people out of their money, and there is no reason why that should be allowed to persist unabated.
Charlie A. Mayville is a marketing representative working on behalf of Tucson Mortgages in Tucson, Arizona.