Payday lenders are often painted as the 21st century's version of the 1950s loan shark—lenders operating outside the reach of the law, inhabiting smoky backrooms, preying on the poor, and lining their pockets from exorbitant interest rates, or even worse.
The reality is payday lenders are regulated, with policymakers feeling compelled to continue adding new layers of regulation and bureaucracy to deal with an issue that is mainly economic.
Payday lenders exist because they meet a need in the marketplace—mainly gaps in lending services that traditional lenders like banks don't. It's the age-old story of supply and demand. However, it's not as clear-cut as that.
There's research indicating consumers apply for short-term loans when their access to mainstream credit options is restricted and when they have troubled credit histories; other studies show consumers choose payday loans over other conventional bank services, and more than nine in 10 payday loan borrowers actually found their experience with terms and cost as expected or better than expected.
Payday lenders meet needs traditional banks don't
When it comes to payday loans, there's no bigger player than Advance America. Started in 1997, Advance America now has over 2,600 locations across the country. In 2012, they were acquired by Grupo Elektra, the Latin American specialty retailer and consumer finance company.
Other national players include Cash America (NYSE: CSH), one of the bricks and mortar leaders in short-term lending. Cash America, like other similar lenders, is now offering online lending via their CashNetUSA portal, offering "fast and convenient ways for consumers to bridge the gap between paydays."
An argument can be made payday lenders have stepped in to fill a need not met by traditional lenders. Recently, Jamie Fulmer, Advance America's senior vice president of public affairs, penned an op-ed for Reuters, pointing this out and making the case for his industry.
Fifteen years ago, the payday lending industry emerged because of consumers' need and demand for access to affordable small-dollar credit – credit that wasn't readily available to many consumers or offered by many traditional financial institutions. Today, according to the Consumer Federation of America, nearly 40 percent of Americans live paycheck to paycheck, with less than a third feeling financially comfortable. The short-term-credit landscape has evolved over the years, as exemplified by the overwhelming popularity and rising cost of competing products like overdraft programs and bank deposit advances.
It's the economy, stupid
In an economic landscape where real wages haven't kept up with the cost of living for many, things like health emergencies, car repairs for older cars needed to get to work, and even paying for utilities force many at the margins to make tough choices.
In a perfect world, no one would borrow money and pay interest rates as high as 300 or 400% on a short-term loan. And it is true payday loans can end up landing consumers on a treadmill of mounting debt.
A better solution might be an economic model offering workers wages they could actually live on. In fact, a strong argument can be made that middle-class wages drive our consumer model. Rather than placing more regulations on short-term lenders, policymakers should recognize that raising the standard of living for all Americans would eliminate payday lenders quicker than any regulations ever could.