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Dueling Fools: Payday Loans Bull

If you've read up on payday lenders, you know that they loan money to people for two-week periods and charge a fee for their service. Those fees range anywhere between $10 and $40 per $100 borrowed, depending on the state in which the loan is made. These companies include First Cash Financial Services (Nasdaq: FCFS  ) , EZ Corp (Nasdaq: EZPW  ) , Cash America International (NYSE: CSH  ) , QC Holdings (Nasdaq: QCCO  ) , Advance America (NYSE: AEA  ) , ACE Cash Express (Nasdaq: AACE  ) , and Dollar Financial (Nasdaq: DLLR  ) . Rick will take these companies to task for what they do. I vehemently disagree. Here's why:

(1) A demand exists for the product
In the early 1990s, there were only a few thousand payday advance stores in the United States. Today there are almost 22,000. Traditional lending institutions do not want to provide short-term credit alternatives to low-income customers because the costs of these loans make them unprofitable. The underbanked population has nowhere else to turn. Opponents of PDLs would see them put out of business, as if patrons of these stores have easy access to capital elsewhere. They don't. In addition, legislating lower profits on the PDL business is unfair, and payday lenders will close up if they can't be profitable. Why not just let the free market take care of itself? Interest rates are already capped by law in most states.

Also, don't be swayed by the negative press put out by anti-PDLers about people who get "sucked into the payday-lending treadmill." For every one of those, I guarantee you'll find 10 who are thankful the industry exists.

(2) Disclosures on fees are provided
Anybody who wants a loan knows exactly how much they are being charged for it. It's all there in black and white. If they don't understand, they can ask. Nothing is kept secret from a client. If they decide that they can afford the fee, then how can it be immoral or wrong to loan them money?

(3) The fees are reasonable and fair
Our banking system is based on the postulation that those with good credit should get more favorable interest rates. Obviously, a bank or any other financial entity is entitled to protect its assets, and we cannot force them to loan money. If PDLs didn't exist, and people had to go to banks instead, you can bet banks would charge them hefty fees for a loan -- if for no other reason than to make those loans profitable.

For those who want to lower the fees PDLs get paid, what other businesses get their fees capped? Tobacco producers? Fast-food restaurants? Drug companies?

(4) Payday advance defaults do not ruin one's credit
If you default on a bank loan, it goes on your credit record. Payday advance defaults do not. Payday advances are also convenient. You can walk out of a store with your money in 15 minutes.

(5)Nobody is forced to take out a payday loan.
If somebody needs money, they are not required to go to a payday lender. As the Center for Responsible Lending is so keen to point out, there are many other places one can go to get a loan. But in many cases, people do not want to go to those other places. They make a free and conscious choice to take out a PDL.

(6) Payday advances can be less expensive than overdraft protection
If you bounce multiple checks, no matter the size, you'll get hit with NSF fees each time. That's as much as $25 per check. If you pay multiple creditors in one day, you may find yourself paying far, far more in overdraft protection fees (which also carry interest, by the way) than you will in a single payday loan.

(7) Payday loans are discreet
The Center for Responsible Lending just loves to point out that people shouldn't use payday loans. There are lots of places to go for money. Get an advance from your employer or a loan from a family member, they say. But money is a very touchy, very private issue for a lot of people. They may not want those people to know they need cash. Payday advances are private transactions.

I could go on and on, but I see it's time for my rebuttal to Rick. Let's see what he's come up with.

You're not done. This is just one part of a four-part Duel! Don't miss Rick Munarriz's bearish opening salvo, Rick's rebuttal, or Lawrence's last word. 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.


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