Payday Loans

Frequently called deferred presentment, payday loans are very expensive, short-term (7 to 14 days), small-dollar loans that are primarily marketed to society's poorest citizens. Due to the exorbitant rate of return, storefront operations by companies with names like "EasyCheck," "Cash Advance," "Check Into Cash," and others are now legally doing business in two-thirds of the fifty states and are growing faster than flesh-eating bacteria. A case in point is the state of Oklahoma which legalized payday loan stores in September 2003. Since that time (140 days ago), around 300 payday lenders have exploded across the state. That's more than two stores per calendar day.

These companies are able to prosper for two primary reasons. They operate as out-of-state businesses to avoid state banking laws and they charge a "fee" when they loan money as opposed to "interest" which would be subject to rate caps. As a typical example, a $100 loan for 14 days would be secured by a post-dated, personal check and a "fee" around $15 would be assessed. This translates into an effective finance charge of about 400 percent per annum. With money invested in a typical certificate of deposit (CD) generally earning less than 10 percent, it's easy to see the attractiveness of investing in payday lenders earning 400 percent or more.

Although they offer a convenient and expedient method of obtaining a handful of cash, there is a significant downside to the business. Unfortunately, the people who avail themselves of the quick cash customarily have already maxed out their credit cards and other loan alternatives and are unwisely incurring additional, unreasonably high-priced debt. Consequently, they are extremely vulnerable to defaulting on a loan payment, placing themselves at risk of lawsuits, property confiscation, and fraudulent schemes for repayment. Citizens and lawmakers are only starting to take notice of the logical negatives associated with payday lending.

Worthy of specific mention is the impact of payday lending on US military personnel. As a conclave of low-paid people with government guaranteed paychecks, military bases are natural targets for the predatory lending practices of payday loan companies. More and more servicemen and women are realizing the burden of unmanageable debt. Besides the basic stress from worry, job performance has been affected due to challenges to a person's security clearance. After all, high debt equals high irresponsibility to some.

A generation or so ago, what is now known as payday lending was called "loan sharking" and it was illegal. It was against the law because of the negative impact that resulted on communities from having an unreasonably high debt burden. Since that time, loan sharking in the form of payday lending has become legal. Unfortunately, the reasons loan sharking used to be illegal have not changed. I suspect the subject of payday lending will become a much bigger issue in the near future.

And, hopefully, something will be done to ease the burden on the US military. They protect us. We should do what we can to protect them from being preyed upon by payday loan sharks.