Pay day loans have their part to play in a free economic market. The tide which turns against them and bans them in several states is a misguided approach as leaves the responsible users of pay day loans with few options to obtain cash in an emergency. The Office of Fair Trading in the UK researched pay day loans and decided they were a valid service which was needed, and in America pay day loans are now regulated. The called for ban in many states seeks to protect irresponsible borrowers from irresponsible lenders, but the consequence of this is short sighted. Naturally banks and credit card providers fear the competition.
When you use your credit card and fail to make more than the minimum repayment you pay interest on the balance. If you miss your credit card payment altogether you will receive a late payment charge as well as incurring interest on the balance. On a credit card debt of around $2000 the two combined charges will cost more than the fee for a one off payday loan which you could have taken to make sure you made your credit card minimum payment on time, plus some towards the balance.
When you run up your credit cards and end up in deep financial water do we advocate making credit cards illegal? Of course not, we put it down to people having financial difficulties or being too irresponsible to manage their finances. Exactly the same principle applies to pay day loans. When they are used responsibly they are there to help people out of a financial hole, and when they are used irresponsibly they can wreak havoc.
Pay day loans are meant to be there to help out with emergency funding for people who have no credit rating or a bad credit rating. They can obtain a loan speedily to tide them over to payday and the absolute ideal use is when a utility is about to be disconnected, and the cost of taking the loan will be less than the reconnection charge. They were not designed to be frittered away on trivial things which can wait until after the next payday.
Although the exorbitant annual interest rates on payday loans are talked up, the whole point is that they are not meant to be annual loans. They are short term loans to be repaid from the next wage, and the amounts lent are nothing like as high as the credit limits extended on a credit card.
Take a look at an average payday loan and ignore the annual rate for a moment. The borrower needs $200 until payday which he can pay back easily as he has some overtime due. Costs vary on the fees charged but an average would be $30. He borrows the $200 and pays a $30 fee, which works out at 15% for that month, and the loan is paid off at the end of the month.
The $30 may in itself be a high fee to pay but it isn’t exactly the alleged rip off when the loan is handled responsibly and the borrower has saved himself the cost of the reconnection charge. No doubt his bank would have kept him waiting too long for a decision on advancing the loan and his utility would have already been cut off. He didn’t want the embarrassment of asking friends or family for a loan, and he doesn’t believe in credit cards.
The borrower who uses these loans for such purposes, and many do, should not be penalized for the irresponsibility of other borrowers. After all their defaults are already factored into the fee he paid, just as credit cards already factor in default rates on their charges.
When credit card companies are pulling fast ones on their customers we don’t expect credit cards to be made illegal, but call for reforms. Payday loans should be handled in the same manner and not made illegal. There will always be people who are incapable of handling their money but they have the right to mishandle it with a payday loan as much as others do with a credit card.