We can find more and more articles, devoted to the changes in regulation of payday lending industry. The main purpose of this regulation is to make payday lenders leave the finance market. It has already happened in Arizona, where a new bill was signed, which bans lenders to establish such an annual percentage rate on the payday loan that enables them to receive profits from the operations. Authorities in Arizona state that the interest rate of 36% is the maximum rate which can protect the payday loan borrowers. Because of this payday lending companies are only let to apply 36% rate, which means that they will receive $1.38 for a $100 loan, given for 2 weeks. These $1.38 fees will never cover operational expenses of payday lenders, even if borrowers will always repay their credit in the due date. In reality customers are not able to pay off their loans on time, which makes lenders charge no less than $15 fees for a $100 loan in order to cover their costs.
When I was reading numerous articles about “consumer protection”, I remarked that all the authors propose to protect borrowers only by banning payday lending options. But I haven’t seen any article yet, in which payday lending opponents offer some other alternatives for the customers who can’t use payday lending services any more because of their elimination in the state.
I think that if authorities really want to protect customers and do it by banning payday lending industry, they are to propose credit alternatives to borrowers. I consider that before imposing such restrictions, legislators should examine the lending market and reveal the level of the demand for payday credit and other short-term financial products in these markets. In my opinion, firstly we should study how the regulation has affected economic situation in the other states, where new protection bills have been passed, and only then take some measures.
So, there are particular reasons for legislators not to consider these issues. Were they really care of consumer financial protection, they would examine the recent report, issued by the New York Federal Reserve, in which economic consequences of eliminating payday loans are described. In this report states, in which payday lending services are allowed, are compared with those states, where all payday lending operations are banned. For example, more complaints about debt collectors and lenders, more bounced checks, and a high amount of applications for bankruptcy protection were recorded in Georgia, the State where payday loans are eliminated.
Another fact which needs careful consideration is possibility of appearing fake lenders. Those customers who have previously borrowed loans from the web stores, which were regulated by the state and are likely to be banned soon, now will be looking for other credit options and may be taking loans with even higher interest rates from so-cold internet payday lenders, which activities are not regulated at all.
The legislators only seem to protect consumers, in reality they do nothing but aggravate financial problems of customers. Instead of banning payday lending industry, they would better study the advantages of payday loans or offer some interchangeable and efficient forms of short-term credit.