Payday Loans – for Better or for Worse?



Payday loans have become a much discussed topic these days – the opponents of the entire idea cry that this type of lending one of the most dangerous and unfair ones with regards to a borrower (taking into consideration high interest rates and the terms of lending); while the proponents – lenders, obviously, try to highlight the advantages and numerous benefits of their product.

Taking into consideration the nature of the new regulations proposed by the Consumer Financial Protection Bureau (they came into effect this summer), it is clear that the authorities see payday loans more as a threat to low-income households than some means of support. However, are payday loans as bad an option?

The thing is that there is no one simple answer to such the question. On the one hand, payday loans do certain harm such as increase in personal debt amount, bankruptcy fillings, applications for government donations and all sorts of various financial problems.

However, there are also numerous researches that proved the use and undeniable positive effect of having access to such small credit option in such situations as financial crisis and aftereffects of some natural cataclysm and etc.

One can suppose that payday loans as a phenomenon are both relatively good and bad – with regards to every given situation. For low-income families, access to such credit solution at times of financial pitfalls is definitely an advantage and a very feasible way to bridge the gap between paychecks, stay afloat. However, such loans can also easily lead to a major financial complication if an option becomes a habit while everything is relatively stable in a person’s cash department.

One of the researches that showed the aforementioned effects was highlighted in the Federal Reserve Board’s paper on the subject (full text here). It outlines two groups of different households – the one with very low income and the other with a better financial situation – both in the stat with pretty lenient payday loan policy.
As it appeared, in case of the households that had very low income payday loans served pretty much in a way they are supposed to (and are described by those who offer them). The paper also proved the positive effect of such small credits in cases when financial complications are further aggravated by some extreme, say, weather conditions – whose families that had access to payday loans managed to cope with money problems better (compared to those households that had no access to such financial product).
It basically seems that payday loans – when used directly as they are supposed to, in cases of emergency, singularly and when the need is real – are able to provide some sort of financial cushion to low-income households.
However, the same research showed that when there is no emergency (no weather whims to deal with, for instance), there is a tendency for the members of low-income households to develop a habit of taking easy cash; which definitely leads to indebtedness and all the problems payday loans are notorious for and accused of.