If more restrictions are imposed the poor will suffer if the payday lenders close their shop.
Small dollar and payday lending companies are offering valuable service to the nation by giving away loans to individuals and small businesses. Many of their clients are people who cannot get cash from conventional banks and lenders because they don’t have collateral or have poor credit score. The money is transferred within 24-48 hours of approval. This is a great help too in an emergency.
However in spite of this, these lending companies have been under attack in recent times. A section of the media has come out with negative stories on these businesses. Many people have expressed concerns on the operations of these companies. As a result, legislation has been passed restricting the operations of payday lenders. There is increasing supervision on their operations.
But things are beginning to change as realization begins to seep in that these businesses indeed offers an extremely valuable service. Kendrick Meek, a former Democratic congressman from Miami, recently wrote to the Consumer Financial Protection Bureau (CFPB) saying that the US should pass new legislation as the restrictions in place currently are simply too heavy-handed. He further stated that the current laws are depriving people of important lending options in an emergency.
Meek even pointed out that many of these businesses could shut-shop soon because of these threats.
Others are beginning to speak out against imposing severe restrictions on payday lending as well.
Andrew F. Quinlan, who is the President and co-founder of the Center for Freedom and Prosperity, now says that the poor people in the United States are going to suffer if the small dollar lending businesses are attacked any further. Quinlan stated this recently while writing for InsideSources.com. The Center for Freedom and Prosperity is a think-tank from Washington that promotes free market ideas and ideals.
Many Americans Are Facing Economic Hardship
A lot of Americans are living from one paycheck to the next one these days. Many of them are of course simply overspending and have too little savings. However there are others who are simply not making enough money to survive. And these are the people whose life will turn to the worse if the proposed rules of the Consumer Financial Protection Bureau that target payday lenders and implemented.
According to estimates of The Brookings Institution, roughly 1/3rd of the US households are living “hand-to-mouth”. That is a staggering 38 million people. Their lives are going to be negatively affected if there are restrictions on payday loans, as many of these people often have to take these loans to see them through till the next pay day. A severe cash crunch could even push them to crime, thus causing a law and order problem.
Those Requiring Payday Loans Often Do Not Have an Alternative
There are a lot of individuals in the United States now who rely on payday loans for paying off unexpected bills and to meet other cash emergencies. These people usually don’t have any other finance alternative.
While most others for instance would use their credit cards to pay for unexpected expenses, these people are forced to take a small loan that lets them stay afloat till the next paycheck arrives. That’s because, given their financial status, limited income and credit history, most banks and conventional lenders deem them too risky.
Of course there are some individuals who are doing well economically but would still take a payday cash advance because most of their money is tied up in long-term savings plans. The small cash loan plans are perfect for them, as they can get the money they need very fast (24-48 hours), which is great for emergencies. These are short-term loans, and so these people can get out of debt quickly too.
But those are rarities. In most cases, people asking for these loans are from the economically backward section of the society. They need this money in emergencies later in the month, and are denied credit by conventional banks and lenders. Payday loans are usually the only credit option for them.
Protection from the CFPB
Ironically, the Consumer Financial Protection Bureau wants to protect these borrowers by ensuring that they don’t go too deep in debt. However, in trying to do this, the CFPB might end up restricting the only credit line they can get. This is could be disaster.
How are these people going to pay their bills at the end of the month, repair the car so that they can go to work, or going to find the money to visit the doctor? It could be a matter of life-and-death for them. Can the Bureau deny them this?
In fact, the Consumer Financial Protection Bureau has also acknowledged this, saying that between 60% and 80% of the payday loan market could get wiped out if further restrictions are imposed. Those who need the money most could then turn to the loan sharks and end up paying even more.
Well loan sharks are illegal unlicensed or not-registered bushiness or lenders. They offer loans at very high rates since they are taking too much of a risk by lending illegally. These people then resort to threat or even violence if money is not paid back.
Is Pay Day Lending Wrong?
Yes, it is a fact that the payday lending agencies charge more than conventional lending companies. But that is because those who want these loans are high-risk customers. Many of these customers default frequently as well. The higher interest and fees are charged to cover for this higher risk. It also allows the payday lenders to stay liquid so that others who need the money can get it quickly in real emergencies.
The higher interest and fees does not usually hurt consumers who pay back the loan in time. They don’t end up paying too much more as it’s just a short-term loan. Also, the higher interest charged has been over-hyped. For instance, the credit card industry keeps charging a high fee and interest. But there is hardly any resistance to this.
Moreover since the loan is small – someone taking a hundred dollar loan may end up paying just 20 or 25 dollars more once they get their pay. That’s a small sum to pay back. Its very affordable too.
What Can Happen If There Are More Restrictions on Small Dollar Lending
Arbitrary caps would be bad, because they won’t allow the lenders to cover their business costs and risks. This is why Dodd-Frank, creator of the agency, is prohibiting a usury cap. However, the CFPB has little congressional oversight and unusual autonomy.
The rules that have been proposed also impose unnecessary burdens that are going to drive the cost of servicing low-income customers. If this happens, then the payday companies have to either charge more or deny money to many customers. Besides, they will have to check credit history and verify income, thus making it more difficult to get the loan. The money cannot be disbursed so quickly as well.
Living from one paycheck to another is not fun. Nobody likes this. But this is a reality for millions of Americans. A payday loan provides them respite. Don’t deny this to people who need the money the most.
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