A Different Perspective on Payday Loans

[Aug 20, 2010.]

 

In a recent Wall Street Journal review of "Broke USA," Katherine Mangu-Ward, a senior editor at Reason Magazine, described payday loans as a much better alternative to what individuals faced before this product existed--borrowing from a loan shark, begging from relatives or going to the local pawn shop. Otherwise, consumers were forced to face a shut-down of their utilities, an expensive bounced check or some other extreme hardship.

Mangu-Ward says that Gary Rivlin, author of "Broke USA," calls payday lenders and other providers of similar services "Poverty Inc." and insists they are predatory lenders. But Mangu-Ward points out that the stories told in Rivlin's book actually demonstrate the positive outcomes for many people who have been helped to overcome a crisis through the use of quick payday loans.

Responsible use of payday loans

Mangu-Ward says that instead of viewing payday loans as dangerous, Americans should perhaps view them in the same light as microcredit loans, which are high-interest, small-scale loans to poor people in developing countries that can make the difference in bringing them out of poverty. She says that Rivlin is intent on "seeing credit-mongers as 'predatory' villains instead of businessmen providing a service to people in need of it."

"It is indeed expensive to be poor: a loan of $100 for two weeks costs between $15 and $25, something like a 300% or 400% annual interest rate. But the money would not be available at all without the fee, and prompt payment dodges virtually all of Mr. Rivlin's dire consequences," writes Mangu-Ward.

Payday loan advantages

Not repaying payday loans can, of course, have negative consequences including the build-up of too much debt. But Mangu-Ward compares the consequences faced by people who had to borrow money from loan sharks in the days before payday loans were available. "The best part about the commercialization of credit to the poor is what happens when someone can't pay: phone calls, visits from collection agencies, tax liens, evictions and perhaps bankruptcy. No picnic, to be sure. But no crowbars either," writes Mangu-Ward.

Payday loans can be beneficial to people when an emergency arises such as a necessary car repair, a utility bill that must be paid to keep heat or lights on or a medical bill that needs immediate attention. Making sure to repay the payday loan on time can prevent the build-up of too much debt or too many payday loans. Consumers who use payday loans should begin to set aside money on a regular basis, even just $25 a month, to build an emergency fund that can keep them from needing too many payday loans.

 

About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.