Payday loans: Why the industry says they're a good deal

Payday loans can wreak havoc on a person's financial life. These loans carry sky-high APRs and the penalties for late or missed payments can be extreme. Many consumers, who turned to payday lenders in a time of need, later find themselves worse off than when they started. In this series, WalletPop takes a look at the payday lending industry and some of its players: those who dole out the loans, the regulators who try to rein them in and the people who desperately take out these loans hoping for a fresh start. This is the second installment of our payday lending series. You can read the first part of this series here.

Believe it or not, there are people who feel that payday lending does a service for cash-strapped customers, that the interest and terms are nowhere near as bad as their detractors make them out to be, and that the government should stop trying to kill the industry with regulation. Of course, most of those people work for the payday lending industry.

But in writing this series of stories, we wanted to give both sides of the story. After all, the market for payday loans is huge -- especially these days -- and not everyone finds themselves in the situation that Joylynn Jossel, the woman whose payday loans spiraled out of control, did. Even if the critics are right, and the terms are harsh or unreasonable, it's clear that some segments of the population around the country rely on these short-term loans as a financial lifeline.

As those in the industry argue, payday lending serves a segment of the population that can't get loans anywhere else due to poor credit. Without payday loans as a safety net, many of these people would be financially doomed. Payday loan services are also available in many urban areas where banks are scarce.

"Nineteen million Americans use payday loan services a year, with more than 100 million transactions done a year," says Steven Schlein, the spokesman of the Community of Financial Services Association of America, or CFSA, which is a national organization that (according to its website) promotes "responsible regulation of the payday advance industry and consumer protections." Schlein says, "There's obviously a giant demand for our services. If anybody wants to compete with us and come up with something better, God bless them, but let us compete with that."

The recession has shed a whole new light on payday lending, according to Schlein. Now, consumers realize that the interest charged on payday loans is competitive with what they'd pay the bank in overdraft fees, he says. "The media may have not always been intentionally comparing us favorably with banks, but as the media went against banks and their overdraft fees, they would say things like, 'overdraft fees are even more expensive than payday loans,' " he says. "That's a message that I've been trying to get out there, as long as I've been working for CFSA. People choose payday lending so they can avoid overdrafts at the bank. Consumers, who live paycheck to paycheck, know the cost of these things, and we come out ahead."

But it's hard not to look at the interest rates charged by payday lenders, some in the triple-digit percentages, and be convinced that the borrower actually comes out ahead by choosing a payday lender over a bank. Schlein explains that payday loans, which offer money to people quickly and regardless of their credit score, "simply can't be done cheaper" mainly because of the risks lenders take on by giving money to people with poor or no credit. "Credit unions will sometimes offer cheap interest rates for a loan, but then they'll have a $25 application fee. With payday loans, there is no fine print, there is no application fee. It can't be done any more cheaply than it's being done," he says.

Schlein takes exception to claims by Congress and consumer financial protections that payday loan agreements aren't transparent. From his perspective, they're very transparent. I have to admit that he's right. As someone who has used payday loans, I can tell you that, at least in Ohio, the terms are spelled out in the paperwork. But I can also tell you that when you're truly desperate for cash, and a company is willing to give some to you, you aren't giving those terms much thought.

Other stories in this series:

Payday loans: How one woman got caught in a vicious cycle
Read Full Story

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