Chances are that you’ve heard some of the debate about payday loans by now. There are some folks out there who give sermons about these types of short term, small dollar loans being evil, and others who talk about how these alternative financial products give a financial lifeline to millions of consumers. The point is – like everything else – people have opinions about the payday lending industry, and it is wise to understand both side in order to make an intelligent decision of your own about the industry. These loans have been available in the country for over a quarter of a century, and like it or not, there is a thriving industry made up of payday lenders, and a huge market for people who need these types of loans. Those who are against payday lending, though, have even pushed so far as to try to get payday loans outlawed entirely.
This is clearly not the right approach. In a free market society, it is wrong to limit peoples’ choices to consumer products, and that includes financial products. Some banks have even hinted that payday lenders are able to offer their products to the market with less limitations than traditional lending institutions face. But is it true that banks are unable to compete with payday lending companies?
Before we dive further in to answer this question, we must consider why so much heat is being directed at payday lenders these days. While there have always been opponents to this industry, none have been as vocal, or potentially powerful as the Consumer Financial Protection Bureau (CFPB.) Even as this article is being written, the CFPB is working on new rules to take effect on the payday lending industry over the next few months.
Currently, the payday lending industry is allowed to do business in 36 states. Some states have set the interest rates on these loans at very unrealistic amounts. Montana, for example, caps the APR on payday loans at 36 percent. This has, understandably, killed off payday lending in this state. Other states, like Colorado, have allowed payday lenders to do business and to charge higher, though still modest interest rates. In Colorado, the payday lending industry is still doing well. States that allow lenders to charge higher interest rates, or with no limits at all, like Texas, continue to see plenty of payday lending companies doing business. This seems to indicate that even with lots of competition in a state, payday lenders can still thrive, if they are permitted to do business without strict regulations on interest rates.
Payday lenders charge higher rates when they can because they are small businesses, and spend about 2/3 of their revenue just to keep their doors open. As is usually the case in business, the higher cost of operation gets passed onto consumers. This is nothing new, and is the same across just about every type of industry. Since banks are more diversified, they do not have some of the problems that payday lenders face. They have mastered the art and science of keeping branches open. Consider this, the top four banks in the country have more branches than all payday lending companies combined. And the banks don’t have to spend as much to acquire new customers as payday lending companies do.
Still, though, many bankers believe that payday lenders are taking too big of a piece of the pie for their liking. This has led to accusations that the banks are “unable” to compete with the payday lending industry. Clearly, however, it appears to be the other way around. There are no politicians or watchdog groups gunning to run banks out of business. There are many such obstacles, and more on the way that payday lenders have to deal with on a daily basis.