Payday Loan Prohibitions: Protecting Financially Challenged Consumers or Pushing Them over the Edge?

As recovery from the economic downturn continues, American consumers face an unabated need for short-term, small-dollar credit. To cope with this need, millions choose to take out payday loans. Often the subject of controversy and criticism, these loans have become a mainstream credit option, considered by consumers alongside so-called “traditional” credit products offered by banks and credit unions. This article examines the issues surrounding payday loans, including consumer credit needs, critical options for fulfilling those needs and consumer rationale, from the perspective of Advance America, Cash Advance Centers, Inc., the country’s largest non-bank provider of cash advance services. When faced with a need for short-term credit, consumers weigh all of their options, including those offered by banks, credit unions, and retail lenders. For example, they compare the economic and personal costs associated with options such as overdraft protection fees, the few available bank and credit union advance products and payday loans, as well as fees for late payment or utilities reconnection. For many consumers, a payday loan from a regulated lender such as Advance America can often be the most affordable financial service available to them when they need it; our company offers low-cost, transparent, and convenient credit with meaningful consumer protections. However, misconceptions abound. Criticism about the high Annual Percentage Rate (APR) stems from a fundamental misunderstanding of payday loans, which charge a one-time, flat fee (typically, $15 per $100 borrowed)—not interest. Similarly, payday loans provide a critical credit option for those coping with urgent, unbudgeted expenses; they do not create additional financial burdens for consumers. These individuals would undoubtedly be worse off without access to credit. As Americans’ credit needs evolve, efforts to restrict access to payday loans and other short-term lending threaten consumer interests. While any form of credit can be abused or misused, wellregulated, transparent services such as payday loans offer consumers a sound choice and effective financial tool for managing short-term financial needs. American consumers depend upon a variety of credit options to meet their diverse needs and expenses. Regulators, consumer groups, and leaders within the financial services industry must collaborate to maintain a wide array of credit offerings and to foster the development of innovative services benefiting the full breadth of consumers