PAYDAY LOANS ARE A “MARKET FAILURE”. In this, they are not consistent with a workable free market economy.
A market failure considered when any entity’s self-pursuit leads to unfair results for the whole of society. This can occur when a singular entity gains “market power”, monopolizing to the point of blocking other entities from fair trade and/or the entity freezing price competition.
In the event of market failure, the government has the arguable right to intercede.
Payday loans do have an up side though. Especially in light of the current mortgage crisis and credit failures, when things get tough, the poor must turn somewhere for help. When a time comes that any individual or family cannot meet the obligations of the week or month, and has not the credit to short-term financing (such as a bank account overdraft protection or line-of-credit), a “Payday” loan can be the difference between paying a utility bill and having the service disconnected.
Argue as we might about the unfair costs of these loans, the poor are, none-the-less, sometimes better off to pay these fees than to try and pay reconnect fees and new deposits on utilities and such. The payday loan rates, in the end, become more affordable than the utility, water and such reconnection/deposit costs would be.
The downside of these payday loans is the largeness of the fee(s) and subsequent interest rates charged to the borrower. In a situation where payday loan companies are free to set their own interest and base fee rates, the setting constitutes what most people would consider outrageous.
Many claim that these poor are the poor because they lack training in finance and money handling. This may have been largely true at one time but in today’s market, the poor are often poor simply because they are making less while inflation skyrockets.
Most know that when they have dug themselves into a financial hole, the best thing to do first is stop digging. However, in the situation of many individuals and families, the fees and interest of payday loans might be dismaying but it is a risk they have little choice but to take. Sometimes becoming an endless cycle, slowly draining people of the little they have with which to survive.
These payday loan companies are legal in most states. Government intervention is a two-way sword and can cause more damage in repercussions to small business than being helpful to the public.
Payday loans are a tragic occurrence; they are comparable to legal loan-sharking. What many people do not realize is that this charging of such high fees constitutes “usury”, which is itself illegal in many states.
These businesses have a legal right to exist but, in many States, they do not have the legal right to collection of defaulted payday loans.
This is to say that if a payday loan goes into default in certain States, the State Attorney General will not prosecute for the insufficient funds check or the fees charged. Usually, the payday loan company also cannot interact with any credit-reporting agency. Though most persons who take these payday loans probably have bad credit to begin with, the payday loan company cannot report them to an agency and worsen their credit.
Payday loans are not consistent with a “Free Market” economy because they are a “Market Failure”. They are legal but are also unethical in preying on the poor and pushing them further into financial distress.
Payday loans do nothing to improve society. They, in fact, are very detrimental to society.
If the poor banded together, repaying these loans without paying the total fees, these ludicrous businesses would lower those fees or go out of business. A free market economy is a two-way street and people should stop letting these payday companies hog the road.