Payday Loan Prohibitions: Protecting Financially Challenged Consumers or Pushing Them over the Edge?

Table of ContentsI. Introduction 1053II. Consumers' Need for Small-Dollar, Short-Term Credit Options 1055III. Financially Challenged Consumers' Credit Choices 1059A. Availability of Small, Short-Term Personal Loans from Traditional Banks 1059B. The FDICs Small-Dollar Loan Pilot Program ........ 1065IV. The Payday Loan Option 1072V. Weighing All Options 1077VI. Critics' Favorite Attack: "Outrageous" Interest Rates and Excessive Profits 1080VII. "Cycle of Debt" or "Important Debt Management Tool"? 1086VIII. Conclusion 1091I. IntroductionAs the United States seeks to recover from a stubborn economic downturn - with progress that seems to ebb and flow - millions of Americans continue to experience difficulty making ends meet. Americans increasingly turn to providers of shortterm credit for assistance in covering basic expenses, as well as unexpected costs that overwhelm already - stretched budgets. Their credit options may include "traditional" forms of credit, such as bank and credit union loans, and "alternative" financial offerings, such as overdraft protection services and various retail lending services.Payday loans are one such retail option available to these consumers, though they are not without controversy.1 Consumer activist organizations, in particular, often focus on the implied interest rates associated with the service and question the consumer rationale for short-term lending.2 Yet, independent research shows, as does the industry's extensive data and experience, that lenders charge competitive fees for their services, and - it is critical to note - customers who understand their loans' terms and pricing typically exhibit a reasoned approach to selecting them and consider payday loans to be a valuable and cost-effective service.3How are misperceptions shaped between critics' allegations, on the one hand, and actual loan pricing and what consumers decide in the real world, on the other? If critics could prevent lenders from offering payday loans, would they in fact be acting in the best interests of those who use these loans, or would they instead be eliminating a reliable option for these consumers, ultimately forcing them to choose more costly or less regulated alternatives?This Article will examine these issues from the perspective of Advance America, Cash Advance Centers, Inc. (Advance America), the country's largest non-bank provider of cash advance services, with over 2,500 centers in twenty-nine states.4 In 2011, Advance America extended nearly $4 billion in credit to more than 1.3 milhon Americans.5The periodic needs of millions of consumers for short-term, small-dollar credit will be highlighted, as will their options for obtaining such credit. This Article will also rebut two primary arguments critics make against this industry, specifically the allegations that (1) payday advances are offered at unreasonably high rates, and that (2) these loans cause most customers to sink into a hopeless "cycle of debt," so to speak.6 Through an exploration of consumers' needs and rationale, this Article will explain that payday advances are often a consumer's least expensive and best available credit alternative - one that consumers would be worse off without.II. Consumers' Need for Small-Dollar, Short-Term Credit OptionsAny discussion of payday lending must be put in the context of the credit needs of American famihes. …