Payday loans are indeed consistent with the free market. They fill a legitimate need in the marketplace. They should also be used a a last resort though. Rates are as high as they are because of the extreme risk the lenders take. Risk vs. reward needs to be taken into account. People fall into the payday loan trap not because of bad lending but because of a lack of education.
Payday loans do have a purpose in our society and can be beneficial if used correctly. For instance your car breaks down and you need to have repairs done ASAP to keep your job. You have bad credit because of a bankruptcy and you have no savings. You get a payday loan for the amount of the repairs. You then cut back your daily living expenses and pay the loan off when it comes due.
People get in trouble when they use a payday loan for expenses like paying for a TV or use them to live beyond there current means. People tend to not know the difference between needs and wants. Cable is a want yet some seem to think they need it. Now unfortunately the poor are the most uneducated and also are very poor managers of money. This means they are more likely to use a payday loan for items that they shouldn’t.
One thing to note about payday loans is that they are unsecured loans. The company has no recourse to go after a non-payer. Yes there are bad check writing laws but writing one bad check will not land you in jail.
There are shady businesses wherever you go. People think banks are safe and they don’t have to worry about them taking your money. Just the other day on the news a bank manager was sent to jail for misrepresenting his business saying he was FDIC insured when his bank wasn’t. He stole over $2 million dollars. All industries have shady people in them. Some have more than others.
Payday loans ruin lives exactly the same way credit card debt does. People sign paperwork with the terms of the agreement. If you don’t like the agreement then don’t sign it. You don’t have to use a credit card and people don’t have to use payday loans. Outlawing payday loans because of loan sharks is like saying we should outlaw selling door to door because of scamers. The same can be said of alcohol. When used responsibly it can be a good thing. When used irresponsibly it has deadly consequences. Fortunately in the the worst of cases payday loans do not involve death.
If a person needed $400.00 for car repairs and they didn’t have any friends or family to borrow the money from and they had bad credit what would you tell them? Your out of luck and are now going to become homeless because you will lose your job? Of course not!
Where I take issue with payday loans is that they are not regulated nearly enough. We could fix nearly all of the problems with payday loan shops by regulating them thoroughly. Some states do have usury laws but they are usually very loose and loan shops can get around them. They need to limit the fees charged by lenders and also limit the APR they charge.
In closing are payday loans consistent with the free market? Yes! They fill a need which is the basic concept of the free market. If there was no need then payday loan shops would not exist in the free market. With that said, payday loans need to be used responsibly and only as a last resort because of the high fees charged. There needs to be more education of payday loans targeted to minorities and low income areas. Lastly there needs to be much more government over site.