Are Payday Loans Consistent with the Free Market – No

Payday Loans are not consistent with a free market. In a free market both the seller and the buyer have the opportunity to walk away from the deal no worse for wear. In the typical transaction between payday loan makers and folks who need some immediate cash, the need for the cash far out weights any reasonable assessment of the terms and conditions of the loan. It is highway robbery, legalized in a number of states through graces of the banking and credit card lobby.

The almost humorous part of the whole transaction is that for less than $75,000 you too could become a payday loaner. These entrepreneurs simply act as a broker, taking the loan request to the legitimate financial world who discounts it back to the loaning agent. This transaction is done about once a week, or whenever the loan volume reaches a certain level – say $100,000! The banks, or other legitimate financial center simply accepts the package of securities and pays a set percentage back to the loaning agent. The loaning agent will collect the fees, split the interest with the house, and make a ton of money in the process.

If you are charging 2-300% for the money loaned, plus fees for processing the loans and everything else that can legally be piled on, it doesn’t take long to make up the discount you will suffer when you take the securities to bank. A sickeningly large percentage of payday loans never get paid off and result in collection efforts, small claim court actions, loss of cars and other pledged items.

Many states have found so many abuses of the law and common sense they have (or are) enacting consumer protections, limiting the the types of fee’s and capping the interest rates. I was delighted to read in our local paper that many closures in the pay day loan business followed Oregons’ enactment of an interest cap. A local loan merchant was quoted as saying that without the 300% interest he was charging, he would go broke! Couldn’t happen soon enough!

And of more recent interest is the effort of some of the local banks to cut into this business. Despite the rigorous interest caps and state/federal regulations in the personal loan field for organized banks, they seem determined to cut themselves into some of the interest gravy. An ad appeared in the local paper very deliberately informing folks that the bank could quickly make loans to “qualified” customers who could secure them with a paycheck or car title.

In my opinion, payday loan makers are despicable merchants with no redeeming values for the business, financial or related worlds. They should be banned.