The consumer protection agency, which was set up by President Obama, had its first hearing in the public domain earlier this month about payday lending. This industry currently brings in approximately $7 billion in fees per year. The session was held in Birmingham, Alabama, and the Consumer Financial Protection Bureau said that testimony from this hearing would help them decide on regulations to the industry in the future.

According to the Bureau’s Director, Richard Cordray, short-term cash loans are perfectly okay as long as the lender is helping and not harming the borrower. This is the first time that the Federal Government will be examining payday lending as it was up to each individual state to run the rule over instant cash loans before now.

Popularity

An estimated 20 million Americans are availing of payday loans. Lenders defended their practice by saying that interest rates are actually quite low and that the application procedure was also extremely easy. Many members of the crowd at the public hearing have successfully used emergency cash loans and were delighted with the service received. Yet these stories cut little ice with Stephen Hoyt, member of the Birmingham City Council, who said that payday loans have excessively high interest rates attached.

The Bureau itself hit the headlines because of severe Republican opposition to its formation. The Republicans are also unhappy that Cordray was appointed as Director. Bill Armistead, chairman of the Alabama GOP, is also unhappy at the formation of the Bureau, which he feels could make decisions that hurt an economy that is already fragile.

Short-term cash loans have often been criticized by defenders of the poor who state that such industries take advantage of people on low incomes. Payday loan companies in Alabama often open in the place of closed convenience stores and fast-food restaurants. It is interesting to note that the average user of short-term loans in the United States earns around $900 a week, hardly belonging in the low-income bracket.

Rules

Instant cash loans are now legal in 32 states, each of which has their own individual rules. For example, lenders in Alabama are not allowed lend more than $500 with a maximum interest rate of 17.5%. It should be noted that this is total interest on the loan, not APR, which can be as high as 456%. However, a $100 loan over 14 days will result in a maximum of $17.50 interest being repaid. This can hardly be seen as extortion and residents of Alabama clearly agree as 20% of households in the state utilize payday loans.

Ted Saunders, CEO of Community Choice Financial Inc. in Ohio is outraged at statements, which say that the short-term cash loan industry chews people up and spits them out. He said that payday lending is well regulated and that states should look for companies that break the rules rather than making sweeping changes in the industry. According to Republican politician Oliver Robinson who represents Birmingham, new regulations could damage the lives of people in his area. Mr. Robinson also said that people often can’t get a loan from banks and that emergency lenders offer an important service.

Payday lenders have warned that the new regulations placed on them may drive people into the arms of loan sharks and other unregulated lenders. The states where instant cash loans are legal have implemented a number of strict policies over the last few years which are threatening to bleed the industry dry. According to payday loan companies, these measures are not protecting the consumer at all. In fact, it is placing them in great danger as people desperate for cash will now turn to illegal lenders who are notorious for their exorbitant interest rates.

Owners of payday stores are upset that the new regulations seem to allow online cash loan companies to thrive while physical stores find it hard to survive. Tony Scales of Express Check Advance suggests that regulators don’t take into account the emergency needs of people when they introduce these harsh new rules. Jamie Fulmer of Advance America agrees. He said that the new regulation will merely play into the hands of underground lenders who really take advantage of people. The Consumer Financial Protection Bureau (CFPB) is determined to regulate the industry with its head, Richard Cordray, stating that payday loan companies have escaped regulation for too long.

The Need for Emergency Cash Loans

The instant cash loan industry really boomed in the 1990s and first decade of the new century as they loaned money to consumers with poor credit scores and others who were unable to get a loan from a bank. Short-term loan companies point out that the actual interest paid is not that high with an average of 17% paid on the average loan of $345. While this may seem high, the emergency factor needs to be taken into account. These customers have no other alternatives. Consumer groups say that cash loan companies like this take advantage of low income families who can’t afford to repay, end up paying rollover charges and remain caught in a web of debt. The peak year of the industry was 2007 when it made almost $7 billion in profit.

Rise of Online Cash Loans

Although some states have made payday loans illegal and this has caused the fall of many physical stores, online lending is going from strength to strength. This form of lending has doubled in the last five years but the concern is that illegal online loan companies are operating amongst those who follow the rules. The Consumer Federation of America claim that online cash loan companies charge 50% more interest than storefront loan companies.

The CFPB’s main concern is to closely monitor non-banking financial companies that provide financial products. The CFPB aim to learn more about payday lenders and ensure that they are operating within the law. However, it is feared that overzealousness on the part of the CFPB could cause consumers to look to illegal lenders for financial assistance. There is no doubt that payday lending needs to be regulated but creating new rules that will cripple this type of company will be terrible news for the consumer in the long run. Banks consistently turn their backs on the needy. We need a regulated alternative that can offer instant cash when necessary or else loan sharks will win.

The recent furor over payday loans makes one wonder: If they are so awful and take advantage of low income families, why do people use them? More to the point, why are so many people avoiding banks like the plague? Best estimates indicate that more than 18 million Americans have no bank account whatsoever with a total of 60 million people ‘under-banked’ which means they rarely if ever use their existing account. It is not uncommon for under-banked people to use the services of payday lenders. But if banks are the champion of all that is great in the financial world, why are an increasing number of people steering clear of them?

The Truth

Perhaps because banks are as bad as any ‘predatory’ lender. Short-term cash loan companies are often depicted in the same way as one would describe a loan shark. The fact that companies of this nature are heavily regulated by their resident states and potentially the Federal government seems to slip beneath the notice of most anti-emergency cash loan protesters. They cling steadfastly to the outdated notion that instant cash loan organizations charge too much interest, deliberately do so to gain even higher rollover fees and hide their true intentions. In actual fact, payday lending is one of the most transparent financial services there is. Companies are required by law to spell out their terms and conditions.

Fees

Banks on the other hand, like to make things nice and complicated. For instance, banks in America like to slap an average fine of $36 on an account that is overdrawn for one day. This is far more restrictive than the payday loan companies that charge the highest level of interest. Those who use check-cashing services and use money orders to pay bills could be hit with fees of over $700 a year. Banks desperately try and justify their conduct but they can’t really expect the public to swallow such fees and charges for the privilege of placing their money into a bank account. And we won’t go into the laughable difference between the interest offered on savings accounts and what they charge for a loan. Nor will we talk about the almost criminal difference between what they buy and sell foreign currencies for (a difference of up to 11% in many instances).

The Customer Is Always Wrong!

There is a lot of negative publicity surrounding payday loan companies but at least they won’t have you arrested if you choose not to use their services unlike a Citibank branch in New York. Yes, this actually happened in October 2011 when a host of customers gathered to close their accounts at the same time. They launched a peaceful protest against the bank and were promptly arrested. None of the protestors used physical force or even foul and abusive language. Nonetheless, 23 of them were arrested.

So, the next time someone asks you why you’re one of the 60 million under-banked Americans or why you like to use the services of an instant cash loan company, explain to them that payday lenders are more honest than their bank counterparts and won’t have you arrested if you annoy them. Cash loan companies are not the problem, the arrogant ‘holier than thou’ attitude of the banks is.

Currently there are several US cities trying to muscle in on the lucrative payday loan craze. Some of the major players would include US bank, which has branches all across the country.

Payday loans have become more lucrative than ever because of their convenience and easy attainability. A person need not have good credit and the money is deposited directly into their checking account. Conventional banks don’t offer such convenience.

Banks competing and losing

Banks have been trying unsuccessfully to compete with payday loan stores and other check-cashing services, which typically charge very large fees. Banks hope by offering lower fees they can attract customers. The problem is that their standards are usually very stringent and it freezes out a large segment of the population.

Banks offering alternatives

Seeing as how banks are having a difficult time competing with the lucrative payday loan business they are trying to steer customers into other options. Some are advising consumers of payday loan stores to contact consumer credit counseling agencies before considering taking out a payday loan. Many consumers have already tried using such services, unsuccessfully.

What major banks are hoping for

Banks are not be able to compete with the payday loan business, so instead they try to redirect consumers to them. The goal is to offer services such as financial analysis, debt counseling services and other alternatives. Banks assume that if people are willing to pay outrageous interest rates for short-term cash, then they may be willing to use some of that money to pay for debt counseling services.

The only problem is that debt counseling services are not what some people need in a tough economy. Some people need access to quick cash, which banks have made all too clear they are not willing to give easily.

The cost of everything seems to be going up these days and people are finding that their household budgets are becoming less and less. Yes, the cost of living is soaring, and in tough times people look to options they may have never considered, such as payday loans. Some people may even rely on payday loans to cover monthly expenses on a regular basis.

Warning against relying on payday loans consistently

Liz Chadwick, Chief Executive of DAWN Advice gives warnings for those relying on payday loans to cover monthly expenses on a regular basis. Research by Citizens Advice revealed that the amount of people currently facing financial hardships due to payday loans has more than quadrupled in the past two years.

Some say the disadvantages outweigh the advantages

The advantages of payday loans cannot be denied. Payday loans are easily available all across the country and no credit checks are required in order to obtain them. The money is easily deposited into a personal checking account once approved. Access to such easy money seems to be too much to turn down for some people who need cash now.

Not to be looked at as a short-term credit

Consumer advocacy groups warn that people who decide to use payday loans should not look at them as short-term credit. People should resort to payday loans only if they feel they have exhausted any other options available. These warnings come because so many people end up missing repayment deadlines and then their debt rolls over. The interest rates can grow until a person is unable to keep up with paying anymore.

How payday loans should be regarded

Payday loans are meant to be used for people who are trying to make ends meet until they receive their next paycheck. Advocacy groups advise people to manage these loans very carefully if they feel they must utilize them, and be sure not to become trapped in a vicious cycle of over relying on them.