payday loans and a profile of the average borrower

The lending industry has come under a lot of fire recently because the rates of interest charged for payday loans are at best expensive and at worst, criminal. There are currently more payday loan stores nationwide than there are McDonald's, Burger King and Subway restaurants combined. The quick cash loan business is successful and is expanding faster than anyone could have predicted several years ago. With rates of interest that can exceed 400% annually, payday loans are one of the most costly ways to borrow.

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The studies on the typical quick cash customer disagree with those put forth by the industry. The cash advance loan industry purports to provide a much-needed service in the community and claims that their typical client can afford the loan and takes them as a convenience, as opposed to necessity.

The arguments that defend the lending industry can be debated at length, but the loans remain popular despite laws that require that the loan company disclose all of the terms in writing. One claim that cash advance lenders frequently make that is simply false is that their average customer is not poor, but instead a member of the middle class who simply borrows from them for convenience. The industry defends its prices, noting that A) they are selling convenience and B) the interest rates they charge aren't really interest, they are costs and C) the cash advance loans are for periods of two weeks, rather than a year, so the annual interest rate is irrelevant.
 

A recent study conducted in Arkansas paints a decidedly different picture from the nice one suggested by the cash advance business. Studies suggest that the average payday loan customer is not particularly well off, and borrows because they really need the money.

More than two thirds of those surveyed said they obtained a quick cash loan because they simply had no alternative.

Based on data from the survey, fifty percent of those surveyed said that they applied for a bank or credit union loan before obtaining a cash advance but were denied due to a history of bad credit.

More than three quarters of borrowers did so because they were receiving threatening letters from lenders to whom they owe cash.

This survey strongly suggests that the major recipients of these advances are indeed the working poor. The standard customer does not obtain these advances because they are handy, but because they are literally the only opportunity to borrow cash to pay bills or survive until the next paycheck.;; It's a pretty sad state of affairs when the only practical source some people have to borrow money is one that charges a minimum of 400% annually.

Obviously, lax banking regulation is a double edged sword. The market continues to define whether or not these companies will continue to operate, because if no one wanted these advances, no one would buy them. South Dakota established lax usury laws to bring banks to the state, just to see quick cash stores pop up on every street corner. There is no simple solution to serving the interests of both consumers and lenders, as the lawmakers in South Dakota have learned. Legislators in a few states keep trying to find answers that will allow these taxpaying businesses to stay while guarding the people who clearly have no other place to go.