Payday Lending And Predatory Lending Practices
- By Tarun Jaswani
- Published 09/23/2008
- Loans
- Unrated
Tarun Jaswani
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Payday lending is a controversial practice and faces both legal battles and public perception challenges in nearly every place where it is practiced. An early day motion criticizing the payday lending market for high APRs and for locking customers into a "cycle of credit dependency"; it also noted the growth of Dollar Financial, a US-based payday lending company trading as Moneyshop in the UK, and called for a public inquiry into the growth of high cost lending in general and payday lending in particular.
Exploiting Financial Hardship for Profit
Critics[who?] blame payday lenders for exploiting people's financial hardship for profit. They say lenders target the young and the poor, particularly those near military bases and in low-income communities. They also say that borrowers may not understand that the high interest rates are likely to trap them in a "debt-cycle," where they have to repeatedly renew the loan and pay associated fees every two weeks until they can finally save enough to pay off the principal and get out of debt. Critics also say that payday lending unfairly disadvantages the poor, compared to the middle class who pay at most 25% or so on their credit cards.
However, opponents of government regulation of payday loan businesses argue that some individuals that require the use of payday loans have already exhausted or ruined any other alternatives. One advocate of unfettered payday lending observed,Payday lending services extend small amounts of uncollateralized credit to high-risk borrowers, and provide loans to poor households when other financial institutions will not. Throughout the past decade, this "democratization of credit" has made small loans available to mass sectors of the population, and particularly the poor, that would not have had access to credit of any kind in the past.
These allegations against the payday-lending industry are largely without merit, and generally reflect the views of "do-gooder" anticapitalist elites who abhor the "messy" and unplanned outcomes in low-income consumer finance markets. Rather than seeing payday lending practices as a creative extension of credit to poor households who may otherwise be without loans, these critics see it as yet another opportunity for government intervention in the name of "helping" the poor.
Aggressive collection practices
In US law, a payday lender can use only the same industry standard collection practices used to collect other debts.
In many cases, the borrower has written a post-dated check to the lender; if the borrower defaults, then this check will bounce. Some payday lenders have therefore threatened delinquent borrowers with criminal prosecution, for check fraud[23]. This practice is illegal in many jurisdictions.
Exploiting Financial Hardship for Profit
Critics[who?] blame payday lenders for exploiting people's financial hardship for profit. They say lenders target the young and the poor, particularly those near military bases and in low-income communities. They also say that borrowers may not understand that the high interest rates are likely to trap them in a "debt-cycle," where they have to repeatedly renew the loan and pay associated fees every two weeks until they can finally save enough to pay off the principal and get out of debt. Critics also say that payday lending unfairly disadvantages the poor, compared to the middle class who pay at most 25% or so on their credit cards.
However, opponents of government regulation of payday loan businesses argue that some individuals that require the use of payday loans have already exhausted or ruined any other alternatives. One advocate of unfettered payday lending observed,Payday lending services extend small amounts of uncollateralized credit to high-risk borrowers, and provide loans to poor households when other financial institutions will not. Throughout the past decade, this "democratization of credit" has made small loans available to mass sectors of the population, and particularly the poor, that would not have had access to credit of any kind in the past.
These allegations against the payday-lending industry are largely without merit, and generally reflect the views of "do-gooder" anticapitalist elites who abhor the "messy" and unplanned outcomes in low-income consumer finance markets. Rather than seeing payday lending practices as a creative extension of credit to poor households who may otherwise be without loans, these critics see it as yet another opportunity for government intervention in the name of "helping" the poor.
Aggressive collection practices
In US law, a payday lender can use only the same industry standard collection practices used to collect other debts.
In many cases, the borrower has written a post-dated check to the lender; if the borrower defaults, then this check will bounce. Some payday lenders have therefore threatened delinquent borrowers with criminal prosecution, for check fraud[23]. This practice is illegal in many jurisdictions.
