Dueling Fools: Payday Loans Bull Rebuttal

Rick laid out some emotionally compelling arguments against payday loans. One of them posits that payday lenders (PDLs) are immoral because poor or uneducated people use them. Not only is that false -- since the fastest-growing segment in PDL usage is the $50,000-$75,000 income earner, and 55% of PDL users have had some college education -- but the logic is faulty.

Using Rick's logic, if you don't know enough to use the Internet to find the best price on a product, and instead buy it at the retail price at a bricks-and-mortar store, the retailer is immoral, and the consumer should be educated about Motley Fool Rule Breakers pick (Nasdaq: OSTK  ) .

Rick calls PDLs "predatory" and its customers "victims." This is unfair, because the transaction is not unilateral, like a thief stealing from a bank. The customer has come into the store of his own free will. You aren't a "victim" when the fees are disclosed and you make a choice to use the product. Using Rick's logic, a company that sells liquor to alcoholics is predatory, as well as tobacco companies that sell cigarettes to smokers. Does that mean McDonald's (NYSE: MCD  ) "preys" on the obese? Of course not. This is just targeted advertising. The consumer can choose whether or not to use a product or service.

Rick also makes the error of translating fees into APRs. Say I take out a $100 loan from a PDL, and it costs me $40 to do so. The APR on that loan is 390%! But look at fees at other merchants. Suppose I bounce a $100 check. I get hit with a minimum NSF fee of $25 by my bank. The APR is 650%! Suppose I pay my $100 credit card balance late? The company charges me a $28 fee for doing that, making the APR 728%!

But do consumer groups get up in arms about ATM and NSF fees? No. Anti-PDL ideology makes people inclined to view fees inappropriately as APRs because the product is called a "loan."

PDL fees are not out of whack with reality. The better your credit, the better your loan terms. Unfair? That's capitalism. Without that system, we'd have economic chaos and bankrupt banks.

Finally, Rick points out that consumer education will destroy payday lenders in the long haul. Consumer education will never destroy PDLs, because a demand will always exist for the product. The majority of consumers already are educated. Even if they weren't, nobody serves the underbanked community because it isn't profitable.

You can take that to the bank.

You're not done. This is just one part of a four-part Duel! Don't miss Rick Munarriz's bearish take, Lawrence's bullish argument, or Rick's rebuttal. When you're done, you're still not done. You can vote and let us know who you think won this Duel.

Fool contributor Lawrence Meyers thinks people should take responsibility for their own actions and not endorse victimhood. That means that, although he owns none of the stocks mentioned in his side of the Duel, your investment decisions are your own. The Motley Fool is investors writing for investors.

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