Should Payday Loans Be Illegal?

Payday loans are typically small, unsecured loans that can be obtained by most people who have a job and a checkbook. You simply write out a check for the amount you want to borrow (plus interest, of course) and the loan agency gives you the cash, holding on to your check. If all goes according to plan, you return to pay off the loan, in cash, on your next pay day (or, in some instances, the pay day after next) and the loan company gives you your check back. If for some reason you don’t show up to pay the loan off on time, they cash the check.

How They Should Work

Done the right way, a payday loan can be an important stopgap for someone who hits an emergency with no way to pay for it between now and payday. A good example is when your car breaks down. If you’re like most people, you can’t get to work if your car won’t run. So, sucking it up and paying the high interest rates might be worth it to get your car back the same day so you don’t miss a lot of work. As long as you pay the loan off on pay day, it isn’t a big deal.

How They Usually Work in Reality

 

Too often, people borrow more than they’re going to be able to repay. Of course, not repaying it isn’t an option, so after you repay your loan, the company “re loans” you the money, less the interest, of course. With a typical $400 loan at 13% interest (a typical rate), you’re out $52. In some cases, clients keep re loaning the money over and over again. On the hypothetical $400 loan, re loaning will cost you almost $700 in a three month period, just in interest.

So, Should They Be Illegal?

 

The state or Arizona thinks so. Recently, legislation was passed in that state banning payday loans. And numerous other states have passed legislation heavily regulating the practice. In Michigan, payday loan agencies are required to give borrowers the option of paying their payday loans off in three monthly payments (though this may prevent future borrowing). But making them illegal takes away an important option for people who need the credit and don’t have other options.

So What Should Be Done?

 

We don’t claim to have all the answers on this. One thing the loan companies could do to police themselves is to stop promoting the loans as the answer for immediate gratification of things such as vacations and other desires that may be better put off if people can’t afford them. And whatever they do or don’t do, you can always manage your own affairs by refraining from using payday loans except when absolutely needed.