Did anybody see this...thought it was interesting

Payday loan not the worst option

Jan. 28, 2007 12:00 AM

Payday lending just might be one of the best of the unappealing financing options open to cash-strapped individuals.

The practice of extending fairly small, short-term loans secured by a worker's postdated personal check certainly is controversial. Critics claim the fees, when expressed as an annual interest rate, amount to usury. They also accuse payday lenders of targeting vulnerable groups, such as single mothers and military personnel.

But, in some respects, payday lending is better than many other financing alternatives. "Our industry exists solely because we offer our customers a product that is more desirable than the alternatives," said Darrin Andersen, president of the Community Financial Services Association of America, an industry group.

His comments came in response to a new government report that provides some exoneration for the industry.

Researcher Donald P. Morgan at the Federal Reserve Bank of New York saw little reason to label the industry as "predatory," though he also noted it's hard to define the term. In fact, Morgan found people living in states where payday lending is largely unregulated are less likely to report being turned down for credit, with no greater likelihood of carrying higher debt or missing debt payments.

"The latter result is consistent with claims by defenders of payday lending that some households borrow from payday lenders to avoid missing payments on other debt," Morgan wrote.

The study also asserts borrowers can get better deals in neighborhoods that count lots of payday-lending stores for the simple reason competition drives down fees a bit.

This observation undercuts the argument for restricting payday lenders through regulation. It even paints the clustering of payday-lending stores in low-income areas and around military bases as a good thing.

Also, the boom in payday lending appears to have cut into the business of pawnshops, which offer a financing option that arguably is less savory than payday lending.

The study didn't delve deeply into other unattractive alternatives, but you can make a case that payday loans aren't worse, and perhaps better, than taking a cash advance on a credit card, running chronically high credit-card balances, triggering late fees or missing bill payments altogether, especially if such moves result in foreclosure, eviction or damage to your credit score.

"Despite (the) high cost, perhaps payday loans help risky households better manage their finances," Morgan wrote.

But all this shouldn't be construed as a reason to run up chronic payday-lending tabs. The practice is expensive, as Morgan noted in the report.

Using an example cited by both Morgan and the trade group, a typical two-week loan costs $15 for each $100 borrowed. Expressed as a yearly figure, that equates to a 391 percent interest charge.

(You derive that by multiplying the percentage fee, 15 percent, by the term, as expressed as 365 days divided by the number of days in the loan. In this example, you would multiply 15 percent by 365 ÷ 14.)

Clearly, those are steep fees for people who make frequent visits to payday-lending stores.

Conversely, the Community Financial Services Association points out that consumers rarely would incur such a high charge because they wouldn't likely take out or roll over 26 loans in a year. Arizona, for example, permits only three consecutive rollovers, a fairly typical number, according to an association spokesman. Arizona also permits a typical $500 loan maximum, he said.

Some 37 states regulate payday lenders, who operate 22,000 stores nationwide.

More to the point, payday loans and options, such as pawnshops, chronic credit-card balances and bill-paying deliquencies, all are symptoms of an underlying illness: insufficient personal savings.

People who can sock away an ample sum for a rainy day - financial advisers often suggest enough to cover at least three months of expenses - won't need to visit payday lenders.

Yet the personal savings rate in the United States has been running in negative territory for two years, and millions of people live paycheck to paycheck.

Some of this is unavoidable - driven by high medical bills, for example - but much of it stems from voluntary decisions.

For those who are unwilling to save, payday lending doesn't look so bad, warts and all.