Federal Regulators Engage in a Misguided Campaign Against Payday Lenders

For an interesting analysis of the government’s paternalism regarding short term lending, see the WSJ article by Ronald L Ruben regarding a lawsuit filed against several federal agencies last month by the payday lending industry trade group, the Community Financial Services Association of America. Read the article here.
The payday-lending business involves lending small amounts of money ($375 on average) to people in need of quick cash.  The borrower uses their next paycheck as collateral.  The loans carry fees of about $15 per $100 borrowed and must be repaid within 14 days.  Many borrowers repeatedly “roll-over” their loans by taking out identical new ones to repay the fees.
Federal regulators vilify Payday lenders for taking advantage of desperate people.  But, as usual, the Government’s paternalism is not in line with the desires or understanding of the borrower.  Recent studies by the PEW Charitable Trust over the past two years found that 6 out of 7 borrowers say the terms and conditions are clear.  The Study also found that borrowers appreciate the credit being available to them, stating that the loans relieve stress rather than cause it.
Short term loans are expensive but can be a lifesaver to a borrower in need of short term cash.  And short term payday loans are frequently cheaper than overdraft fees and long term credit card interest.  Obviously, short term loans are preferable to loan sharks, and are very convenient.  Simply put, consumers like payday loans and understand what they are getting into.  The vast majority of borrowers are informed and have calculated that they are better off with a short term payday loan than without it.  A man whose car is about to be repossessed may calculate that he is better off taking out a pay day loan than losing his job because he lacks transportation.  Of course, government regulators are blind to such motivations and as usual, their misplaced paternalism does more harm than good to everyone involved.