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The Good

Consumers make the best financial choice for their situations

Payday advance loans have been under pressure from both the government and consumer groups over the past few years. While they may not be the right choice for everyone, these loans provide a much needed service to many consumers who are looking for an immediate source of extra funds.

Payday Holiday:How Households Fare after Payday Credit Bans
The United States Federal Reserve Bank released a Staff Report in November 2007 that concluded that the statewide ban on payday quick cash loans in North Carolina and Georgia left consumers without realistic options for credit. The report further found that the prohibition on payday loans in those states forced consumers to seek even less favorable - and more expensive - lending alternatives (such as bank overdrafts) that led to more severe long-term financial problems.

New York Federal Reserve on Payday Advance Loans

Defining and Detecting Predatory Lending
In a separate study released by the New York Federal Reserve Bank in January 2007, titled “Defining and Detecting Predatory Lending,” it was concluded that payday loans do not harm the long-term wellbeing of consumers. Rather the study found that payday lenders aided consumers by opening credit where only more expensive alternatives existed. The study concluded that by increasing the supply of credit consumers ultimately benefited.

Banning payday loans leads consumers with few alternatives and may lead to more financial problems

When financial emergencies happen, people often don't have the luxury of waiting weeks to find out if they are approved for a loan through traditional banking channels. A serious medical expense or urgent car repair won't wait; it has to be taken care of quickly.

Banks and credit unions have severely tightened their lending practices, leaving many consumers in desperate need of other options by which to access extra money. With many states passing legislation to either limit or outright ban payday type quick loans, people are left with fewer choices at a time when their need is the greatest.

With the government trying to restrict or ban payday advance loans in many states and banks generally approving loans only for those people with exceptionally good credit, it leaves the average American consumer in a stressful and desperate position when it comes to finding legitimate sources of quick, extra cash.

Banks are uncomfortable knowing consumers have other loan options

While the banks want the general public to come to them lending, very few banks offer loans that allow the applicant to get a quick decision (same day) and quick access to funds (also same day). With tougher credit standards now in place for people seeking loans, many consumers find themselves locked out of the traditional loan process at the major banks.Remember, too, that it's not necessarily in the bank's best interest to approve loans for their cash-strapped customers. All of the typical fees charged by banks to customers who are having financial difficulties- bounced check charges, late fees, overdraft charges, over limit fees- amount to billions of dollars in revenue annually. Why would they want to help their customers avoid paying all of these fees?

Banks and credit card issuers want to trap you with their offerings

Studies have shown that if all these aforementioned fees were annualized, the interest rate on all of them would equal or surpass the interest rate of a typical payday advance loan. Consider this:

  • If a typical “bounced check” fee charged by a bank were annualized, the interest rate would be nearly 1000%.
  • If a typical credit card “late payment” fee were annualized, the interest rate would be more than 700%.
  • If the typical late fees and reconnect charges from an average utility company were annualized, the interest rate approaches 1300%.


Make the decision for yourself

So, while the government argues that payday advance loans are harmful to consumers because of the high interest rates, the facts don't bear this out. Smart consumers understand this and it helps explain why payday loans continue to be a popular and important part of the financial lending industry.

Our next sections argue The Bad and The Ugly.