Payday loans offer individuals the opportunity to receive an advance on their next paycheck. This can be useful for those who do not possess credit cards or lines of credit to rely on when they have a need for funds before their next payday. Furthermore, a free market is one that allows consumers and producers to interact without third party interference, such as government regulations; therefore, when consumers have a demand and a producer has an adequate supply, the consumer is able to purchase goods at a competitive cost. The trouble with products like payday loans is that do not exist within a competitive market. Although payday loans do meet a demand at a reasonable cost, they target a marketplace that does not allow for competition. At certain levels, payday loans are part of a free market strategy, but overall they undermine a free market.
Those individuals who tend to need products, like payday loans, are those who were pushed out of the normal credit market, because the creditors view them as poor investments. Therefore, payday loan companies produce a product that fulfills the needs of those who cannot or choose not to access the normal credit market. However, these companies prey on those who are in emergency situations or who poorly manage their finances. As such, there is no need for payday loans to be competitive as the consumers are in a situation where they must accept the costs that the producers set on the loan. Furthermore, as there are fewer companies willing to service those outside of the credit market, companies that provide payday loans exist in a near niche market where little to no competition exists, so where there is competition, the company can simply move or set prices at the level of competitors as there is plenty of business for everyone in a depressed economy.
Along with product safety, markets that take advantage of those who cannot afford to “shop around” or exist without competition, pure free market principles harm consumers and the industry. Furthermore, when institutions and businesses are left to form secret coalitions for price fixing, free market principle fail to benefit consumers while a true free market eventually ceases to exist. Without good regulation, which aims to create competition and protect consumers, free markets cannot exist. In some respects, the idea of payday loans is consistent with free market principles, but, like other products, undermines a free market in the long run.