Why Payday Loan Companies Should be Regulated
Dante put usurers, those who charge high interest rates on loans, in the 7th circle of hell. The general thought was usurers did not “live by the sweat of their brow,” and thus were making money in an unnatural way. While the fantasy portrayed in the Divine Comedy clumped these people with some of the worst offenders, in modern times, we tend to see those who offer short term, or payday loans, at high interest, as a necessary evil.
People, such as Bruce Claymore of My Payday Loans, suggest that their service offers borrowers a safety net that they can’t get from more traditional services like banks and revolving lines of credit. This situation inevitably puts those with bad credit (usually the poor) at the mercy of annual interest rates that often top 400%. In real world terms, this means that if you borrow 200 dollars one week, on your next payday you might owe the loan servicer around 35 dollars. This might not sound like much, especially if you are desperate for the money. And perhaps this would be fine if people simply used these companies as a final resort – as a safety net.
What tends to happen, however, is that people get caught in a vicious cycle in which they must continually borrow every payday to cover the amount they are losing. So 200 dollars turns to 235, which turns into 280, which turns into 350, and so on, until the amount owed in interest has surpassed the original amount owed three, four, five times over.
It is reasonable for a company loaning money to factor into interest things such as rate of inflation, overhead, and risk – but a 400% annual rate surpasses any other type of credit ten times over.
Short term payday loans should be regulated by the federal government in a similar way that credit agencies are. There should be clear limits on the annual interest rates of such loans, and, in general, companies should be required to vet their customer base by not offering credit to people they know will not be able to pay them back. This point is particularly important, because eventually people dig themselves into a whole they cannot get out of, and subject themselves to a slew of penalties, late fees, and eventually legal fees as well.
In a number of ways, the federal government should move to audit these companies in the way that colleges and universities are audited. If the percentage of people paying back the full amount of the short term loan does not meet a certain criteria, then that particular branch should be subject to penalties.
What becomes particularly complicated in this issue is the emergence of payday loan companies in Native American tribes. Because Native American tribes operate under a different set of federal regulations, they are often not subject to the same rules as the majority of the population (such as being able to admit those under 21 into casinos). These institutions would have to be carefully regulated as well, but perhaps not within the same parameters as the companies you can find littered across urban America.