Forcing payday lenders to use the same annual rate calculation as other long-term financial products like home mortgages and automobile loans will make it impossible for short-term lenders to operate. This would result in the loss of jobs for hard-working Mississippians and will take away a source of credit for the state’s consumers.

The city based its action on a special report recently published by The Clarion-Ledger newspaper. That newspaper report included several mischaracterizations of the payday advance industry. It is certainly inaccurate to infer that short-term payday loans caused anyone to foreclose on their home.

The {American Banker} piece stated, “Bankers have long argued that most of the abusive financial practices are those of outfits such as check cashers and payday lenders.” In reality, payday lending customers are provided with information so they can make informed financial decisions. Our member companies are required to post fees in large type on posters in all store locations to ensure that customers know, in simple terms, exactly what the fees are before they enter into any transaction.

Regardless of what bankers argue, payday advance compares favorably to many consumer alternatives, even when two-week payday loan terms are expressed as annual percentage rates. For example, a $100 payday advance with a $15 fee equates to 391% APR, whereas a $100 bounced check with a $55.59 NSF/merchant fee equates to 1449% APR.

Consumers have a right to know all of the fees associated with a financial product so they can choose the option that’s best for their needs. 

Moreover, 41 percent of payday advance customers earn between $25,000 and $50,000; while 39 percent report incomes of $40,000 or more. Therefore, the industry doesn’t “thrive” on the poor. In such an economy, the majority of working Americans are living paycheck to paycheck and need payday loans to absorb unexpected expenses. That’s why they often use payday advance more than once a year. In fact, many bounce checks and use overdraft protection at a much higher frequency than the rate at which they use payday loans. Limiting their use only drives consumers to more expensive and less desirable alternatives.

A great new video from Reason TV. 

Capping the rates, proponents argue, will enable needy borrowers to get the cash they need at a much lower price. All in all, it’s a play for the economically illiterate vote.

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The reality is different. A 2007 study by the Federal Reserve Bank of New York said payday loans shouldn’t be considered “predatory” because they often make customers better off by making it easier for them to get credit. Another study, by a researcher and an economics professor in 2008, found “no empirical evidence that payday lending leads to more bankruptcy filings, which casts doubt on the debt trap argument against payday lending.” Most importantly, capping rates won’t make the loans more affordable; instead the loans won’t be available at all. In fact, borrowers might pay more in fees if they can’t get loans and end up bouncing more checks.

Whether a payday loan is a good deal or not depends on the borrower’s circumstances. Sure, it would be preferable to avoid paying a fee to borrow a couple hundred dollars for two weeks. But if the alternative is bank overdraft fees or late charges on credit card accounts, a payday loan may be the better choice.

There’s one more thing for voters to consider. With the regulations that Montana has already placed on payday lenders, 87 licensed businesses statewide employ more than 500 people. If I-164 becomes law, they probably will be out of work on Jan. 1.

Montana law already restricts payday lending to prevent the trap that I-164 purports to fix.

I recall that the documents I signed mentioned some seemingly outrageous annual percentage rate, but what did I care? All I knew was that I was paying $25 for a short-term loan of $200.

That seemed like a pretty good deal at the time, and it still does. It beat the alternative of scrounging a loan off a friend or relative. My improvidence was no secret, but it would have been more embarrassing to ask a friend for an interest-free loan than to pay a lender a few bucks for the same amount of money.

Will this type of thinking prevail on November 2?

Maybe it’s well intended, but the ballot initiative to “cap the rate” on payday loans is another dose of “nanny statism” with very real consequences.

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I-164 amounts to a we-know-what’s-best-for-you measure, and voters should not buy it.

It may surprise you that these non-bank financial service providers include pawnshops, payday lenders and short-term lenders. They also provide invaluable products such as reloadable debit cards and installment loans. Yet most people’s knee-jerk reaction when they hear the words “payday lender” is to accuse these businesses of predatory lending practices because of the “excessively” high interest rates.

But are they really excessive? One of the most fundamental financial principles states that the greater the risk, the greater the return. In other words, these lenders need to charge interest rates that compensate them for giving money to high-risk consumers — those who have histories of abysmal financial management, not paying their bills or leaving others holding the bag. The default rates are, in fact, excessively high for these businesses.