There is no question that that payday loans as well as the “cash for title” operations do provide a service. Businesses have been making loans to people for years, and collateral has always been a necessity in most cases. If one is willing to give another person money in exchange for interest built on an assumed amount of a paycheck, and the other is willing to pay those fees, then it is consistent with the traditional supply and demand.
The definition of “free market”, according to www.invesotrwords.com, is: Business governed by the laws of supply and demand, not restrained by government interference, regulation or subsidy.
The only restraint placed on payday loans and cash-for-title companies is the amount they are allowed to loan and in some states the term of the loan. Fees such as finance charges and interest rates are also set to be fair to the borrower this also varies by state governments but it does not hinder competition in such a way as to give government control. Considering the absence of major federal regulation, payday loan businesses are given freedom to make profits.
There is a question about the ethics of companies like these which has been the cause of most of the government regulations – Louisiana has a bill intended to completely outlaw payday loans. It has been said by financial planners, like Dave Ramsey, that it is unethical for a company to prey on low income families that do not have good enough credit to get a loan from a bank. Payday loans have enormous interest rates that cause higher income earners to turn away and look for a better deal. Those with lower income may think it is the best deal they can get especially if they have no savings, and desperately need the money now.
As in most cases, the market sets its own price. In the case of loans, the price is set by the lender but with an eye toward competitiveness. The payday loans, on the other hand, offer their loans to a different demographic than do banks. There is also the amount that is paid out by these companies – $200-$1500 mostly is unlike traditional lenders.
Ethical or unethical, it is hard to say it is not consistent with the free market. There are multiple companies operating payday loan businesses, each competing for their share of this particular niche market. Those who do not want a loan, don’t have to get one. But if a person wants or needs the money, there is no government action – so far – to stop them. This is how our free market system works for other types of businesses, and so these companies fit in the market.