There's a big negative externality with payday loans - or really, any sort of consumer credit - that I wish more people were aware of...

As more people use credit for everyday purchases, fiscally responsible people get priced out of the market. The additional cash on hand drives prices up, because there's always some idiot who's willing to pay more now with a credit card or payday loan than he can afford to pay back later. He crowds out prudent buyers who only purchase goods if they have cash on hand. Eventually, it becomes rational for everyone to pay with money they don't have, because otherwise they're simply priced out of the market and have to do without.

An example might make this more concrete. Say that there is a limited supply of some highly-demanded good - say, cupcakes. In economic equilibrium, the price of a cupcake may be $2, and there is enough supply for 25% of the population to have one. This being a functioning market, the cupcakes go to the people who most deserve to have them, "deserve" being a function both of means (how much money they have to spend, a proxy for how much they've contributed back to the economy) and of desires (what fraction they're willing to part with to get that cupcake).

Now say that one person discovers a payday loan shop. He suddenly has much more cash on hand, because he can get a full advance halfway through the pay period. So he gets a cupcake even though he couldn't normally have afforded one, and then has to pay back more in the future. This is still legit though: maybe he just really wanted that cupcake, and is willing to take the future hit to income to have it now.

Imagine now that 25% of the population has discovered the magic of pre-approved credit offers, and suddenly have lots of cash on hand. They bid up the price of cupcakes to $10, and suddenly these profligate folks get all the cupcakes. The fiscally responsible folks who make a decent income but refuse to go into debt have been completely priced out of the market, so their only choices are to join the debtors, or do without. So the number of debtors grows even more, people start needing to take on debt just to survive, and folks have no intention nor ability of ever paying this back.

This is happening in several areas of our economy right now.

There are a limited number of houses. They go to the highest bidder. Therefore, if some idiot pays 0% down on an interest-only options-ARM, he can get more cash on a given income/savings level, and outbid the prudent folks who insist on paying 20% down. This is why it has been essentially impossible to buy a house lately (well, up to 2008) if you have any intention of not being foreclosed upon.

There are a limited number of spots in colleges. There is also massive financial aid available. When families take out loans to send their students to college, they can pay higher prices. Colleges raise their tuition to compensate. It then becomes impossible for people to attend college without taking out loans. (Except for certain elite schools that give outright grants for everyone on financial aid.)

There is a limited amount of food. When large numbers of lower-income people have more immediate cash, thanks to payday loans, grocers can raise their prices accordingly. Other people in the neighborhood are faced with the choice of either taking out loans themselves or going hungry.

I've read a few economic histories that suggest that these debt-inflation cycles hit countries every 80-200 years, and that the end result is necessarily that the money supply spirals out of control. People need to borrow to live, and yet the borrowing fuels further increases in the cost of living. They almost always end in war, which serves as a giant reset button by bankrupting everybody equally. ;-) WW2 was fueled by the debt spiral of Weimar Germany, where they physically couldn't repay their WW1 reparations. The American Revolution was fueled by the Stamp Act ("No taxation without representation"), which was to cover rising indebtness of British war debts. The French revolution was caused the bankruptcy of the French royals.