The Pundit will leave the overall subject of John Hughes point in this op-ed up to debate.  What I’m sure of is that his inclusion of payday loans is misguided and his understanding of them is minimal.  Payday loans aren’t offered to live beyond one’s means; payday loan customers use them to meet unexpected needs and in emergency situations.

Hughes also characterizes the rates as “impossible” ($15 on $100 for 2 weeks on an unsecured loan is “impossible?”) and the customers as “unsophisticated.”  Once again we see the paternalistic lack of respect towards and stereotyping of people whose choices the writer doesn’t understand.  I wonder how often Mr. Hughes pays over 1000% APR on an overdraft fee.

From a report by the Credit Union National Association and the National Credit Union Foundation, “Payday Lending: The Credit Union Way.”

Let’s consider some alternatives for the working mom who is short $100 until payday, 14 days from now. She could get a $100 payday loan, pay $15, and the APR for that two week loan would be 391 percent..

She could also choose to write a bad check and pay an average of $48 in NSF and merchant fees. That would be a comparable APR of 1,251 percent!

Even if she has courtesy pay with her credit union, the average fee is $25, or an APR of 650 percent. Another option for her might be to not pay the $100 minimum balance due on her credit card, resulting in a $26 late fee—678 percent. If she chooses to not pay her $100 utility bill which may result in a $50 late or reconnect fee, that’s a comparable APR of 1,304 percent!

The argument can be made that by securing a payday loan to solve her cash flow needs, this woman is taking a proactive approach to her financial dilemma.

The Center for Responsible Lending indicates the 11 states that banned or limited payday lending saved consumers $1.4 billion in fees in 2006. But eliminating local payday lending activity does not eliminate the need for emergency cash loans. People still come up short prior to payday and the center does not address how these consumers managed their cash-flow problems. If they had to use one of the other alternatives, or had to drive to an adjoining state that made payday loans, or used the Internet to get an even higher priced loan, it is possible consumers in these states paid even more to solve their cashflow problems.

Payday lenders are often accused of taking in “huge” profits and “gouging” their customers with “exorbinant” fees.  With customers willing to steal and welch on agreements they have made, payday lenders often have to write bad loans off as a loss or pay for legal fees to get their money back.  Payday lenders charge a set fee for their services and those fees are set by their costs, if more people are willing to cheat and steal, payday lender’s costs will rise and so will fees.

UPDATE:

It should also be mentioned that members of the Community Financial Services Association abide by the best practices which include an extended payment plan for people who can’t payback right away. 

From the CFSA website:

What happens if I don’t have the necessary funds to repay the advance on my due date?
Each company has its own collection procedures, but every CFSA member company is committed to collecting past due accounts in a professional, fair and lawful manner as required by our Industry Best Practices.

However, if your check is deposited and your bank returns it due to insufficient funds, you may be charged a returned check fee by your payday advance provider, if permitted by applicable law. You should also be aware that most financial institutions charge a NSF (Non Sufficient Funds) fee for a returned check and, in some circumstances, may revoke your checking account privileges.

Remember: You are responsible for full repayment of your account (including a returned check charge, when appropriate). Your payday advance company will contact you to collect the amount due and, if necessary, may turn your account over to a collection agency.
If my account becomes past due, will I face criminal prosecution?
No. In accordance with CFSA’s Industry Best Practices, member companies do not threaten or pursue criminal action against customers if a check is returned unpaid. If it becomes necessary and is appropriate, however, companies may seek civil remedies to collect past due accounts.
Can I renew, or roll over, my advance by just paying the fee again on my due date?
Some state laws allow rollovers, although most do not. Even in states that permit rollovers, CFSA member companies are limited to four rollovers or the state limit, whichever is less. Check with your local CFSA member company to determine your options.

Remember: Limiting rollovers is a consumer protection designed to ensure responsible, short-term use of the service. It is important that you fully evaluate the cost versus the benefit of rolling over a payday advance.