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Payday Loans Not Demonized: Industry Shocked

[Dec 27, 2008.]


The Los Angeles Times chose Christmas eve to run a story about payday loans. But, for once, it was not the sort of attack piece on the industry that the serious press so often carries.

Cautionary Tale--for Borrowers and Lenders Alike

Of course, it carried the obligatory bad borrowing story. A single mother from Anaheim had taken out six payday loans totaling $1,500. Two years on, she still owed more than $1,000, and had paid $7,000 in fees and interest.

For the individuals involved, such stories are tragic. But thankfully they are relatively rare. The LA Times article quotes one spokesman for a trade body as estimating that three or four percent of borrowers become involved in 'horror stories', and that payday lenders dislike bad borrowing practices as much as borrowers.

Certainly, that makes sense. There is no advantage in lending to someone who cannot repay, and hard luck stories--to which the media give great prominence--are bad for business.

Sensible Borrowing

Perhaps that is why many in the payday loan industry advocate regulating or self-regulating the number of such loans that a person can take out at any one time, as well as the number of times that each loan can be renewed.

Borrowers should also look at alternatives to payday loans. Family and friends will often lend at no cost, and some credit unions now offer cheaper alternatives. However, for many, a payday loan is the only way out of a jam, and is a much cheaper option than paying bank overdraft--or credit card late payment--penalties.

An Essential Crutch

Some who campaign against payday loans tend to portray borrowers as frivolous wastrels, who have only themselves to blame for needing a short-term loan. But those who borrow are, according to the LA Times, increasingly drawn from the supposedly responsible middle classes. Today, many sorts of people need this type of help.

And for some--at the other end of the scale--that need is truly urgent. The US Department of Agriculture (USDA) estimates that, in 2007, one in eight American households experienced some form of hunger (or 'food insecurity' in government-speak), and that for 4.1 percent--more than one in 25 households--food security was 'very low'.

Although many of these hungry people would not be eligible for payday loans, the USDA says: "Nearly half of low-income households with very low food security had one or more members employed."

Denying the hungry the ability to take out a small payday loan that would put food on their table until the next check arrives seems harsh. Yet some advocate just that.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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