Where these institutions act responsibly, they provide an important service that otherwise might not exist. But too often they are providing services at far higher cost, and at more onerous terms, than the services made available to higher income people. Certainly, I understand the concept of pricing for risk. But there is a clear difference between pricing for risk and simply taking advantage of people in desperate need. In my mind, payday loans exemplify the worst aspects of the growing disparity between these primary and secondary markets for financial services.
Payday loans are high-cost, short term loans that use a borrower's personal check as collateral.
Since they are borrowing against their next paychecks, and the debt is due all at once in a lump sum, a large percentage of borrowers can't repay the debt and end up having to roll over the debt again and again, paying exorbitant fees and interest costs for the same borrowed funds. Unfortunately, an accurate assessment of these costs is rarely provided to payday loan customers. Congress intended that TILA disclosure requirements apply very broadly to all forms of credit, including short-term payday loans. The fact that payday lenders continue to resist making accurate cost disclosures, with repeated unsuccessful challenges of TILA's application in court, indicates to me that their intent of deceiving people into borrowing at rates far higher than necessary and far higher than most can afford. The fact that payday lenders can threaten to cash a borrower's check, or even threaten criminal prosecution for intentional writing of a bad check, leaves borrowers with few options but to roll over the debt or default on other debts to pay off the payday loan.