As many as 14 states in the country and also the District of Columbia have prohibited payday lending. These states have passed legislation imposing tough terms and limits on payday lending. The US federal government has stepped in too. The Consumer Financial Protection Bureau (CFPB) has proposed regulations in June 2016. These regulations are going to come into practice from 2018.
However, the ground reality is that, there are few options for people who actually need the money.
Reality in the Mississippi Delta
If you travel through Highway 61, you will come across small towns and the fertile farmlands of the Mississippi Delta. There are many fast-food joints, gas stations, discount malls, and several stores that offer quick cash. There’s almost a constant flow of people coming and going to these stores, trying to get cash, and keeping up with the repayments. Most of them won’t get the money they need from a regular bank.
In Clarksdale, for instance, a majority black-town, one in three live in poverty, and this is the only kind of banking available. But payday lending isn’t just restricted to black Americans. You will see plenty of whites, Asians, and Hispanics too across the country. Most of them come from middle to lower-middle class neighborhoods.
Why? Because, there are millions of people in the United States who have no other option. Payday lending is the only kind of credit they will ever get.
Credit unions, community bankers and nonprofits are thinking of coming up with affordable loan plans as an alternative to the quick cash loans. However, for now at least, payday loans are the only real and practical option for the millions when they face an emergency. It could be a sudden medical bill, a burst tire, or a utility bill. Where do they turn to when there is no cash at home? In the absence of anything better, payday loans will put the cash in their pockets to help them avoid bankruptcy.
Jim Hawkins, who is an associate professor with the University of Houston Law Center, feels that most debtors pay off their payday loans immediately after receiving the next month’s paycheck. The problem is only with a small section of the population. By cutting off the credit, all its valid uses will be out of bounds. This may not necessarily be good.
People Who Take Payday Loans
A lot of people look for these cash advances – fast-food workers, government employees, and many others. They have one thing in common. They are often out of cash. It could be a sudden emergency, rent or utilities. They need emergency funds to tide over the emergency till the next paycheck arrives.
93% of homes have bank accounts, according to a 2013 survey. However, about 20% people have also approached alternative finance plans such as online and offline payday loan companies. There are some who even go to pawn brokers, who are worse.
WARNING: AVOID Pawn Brokers
Many individuals are afraid of banks. Their parents have never used banks, and have very little idea of how their processes work. Often, the banks will also deny them a loan, because the cash advance is too small for them, or they might have defaulted before.
This is why many people and even experts are asking the authorities not to take away the option of payday lending. It is their backup plan. CEO of the Community Finance Services Association, Dennis Shaul, agrees that some people get into trouble, but points out that it’s much the same with all kinds of debt. The fact is that, the risks are actually less with payday loans as the amount in question is less.
Both online and offline payday stores work at very little profit. Much of their margins go into getting the client and processing the loan.
There Are 16,000 Payday Stores
So you see, there are valid reasons why payday lending has become so popular. In fact, surveys show that there are 16,000 offline payday stores in the US now, which is more than the number of McDonald’s at this time. Add the number of online stores, and the number becomes even higher. Mississippi has the most number of these stores. Of course, poverty is high in this region of the country as well. The deprivation runs deep in Delta towns such as Clarksdale.
Look at neighboring Arkansas. In this state, payday lending was very popular till the prohibition came into effect in 2009. Arkansas is a poor state too, and is thus a perfect test case to find out the advantages and disadvantages of short-term credit.
In the absence of payday lending, there are hundreds of pawn shops in Arkansas.
Results of a Study Carried Out By the University Of Chicago
According to the findings of a study carried out by the University of Chicago in 2010, payday loans reduced the financial impact of an emergency or natural disaster. Researchers studied the foreclosure rates of properties in the state of California after a disaster. They discovered that there were fewer foreclosures in places that had access to payday loans and other short-term credit schemes.
Shutting down the establishments that offer payday loans may not thus be the solution. Those who ask for the quick cash clearly find value in this.
For instance, another study carried out in 2013 discovered that people staying in Arkansas counties located close to the neighboring states were taking more non-bank loans than those staying in counties located in the center of the state. This clearly shows that the residents were moving into the neighboring states to take the loan, because of the prohibition in Arkansas. So the requirements could not be changed even after the storefronts were shut down.
Sure enough, there are good and there are not so good payday lenders, like it is in every other business. Weed out the ones that don’t follow the laws and extort their clients. But a complete banning of the industry isn’t going to serve any purpose. Legal payday loan companies should be allowed to do business.
The Community Financial Services Association of America or the CFSA is there to look into the operations of all member companies. Hundreds of positive testimonials on payday lending have been submitted at the CFSA website. These are all real customers with real experiences. The federal government can also step in for monitoring. These are surely better models than complete prohibition.
Just for your information we only tie up with payday lenders who adhere to lending laws of their state. A thorough check is done before we let them enter our network of payday lenders in all states where payday lending is legal. We do not have any lender in any state where payday loans are illegal. We respect the laws of our nation and will always abide by its laws. You can apply for a payday loan with our lenders here.
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