The main point behind these newly proposed laws and the debate is the costs of immediate cash loans. For many years this industry has found ways around local and state usury laws (laws which prevent lenders from charging extremely high interest rates). This has led many to compare the industry to the mob-led loan sharks of days past and has given the industry a black eye. Obviously, these rates are astronomical if:
- You routinely take out these loans (i.e. get stuck in the debt trap)
- You don’t pay these loans back on time and go into default
If you find yourself doing either of the above, then you need to stop taking out these short term cash advances now. You need to find a debt councilor who can help you break this cycle, and you need to start saving your money instead of paying it to a lender at 450% APR. However, this needs to come from you – you do not need anyone in the government to hold your hand, treat you as a child, and tell you that the big, bad lenders are taking advantage of you. You need to educate yourself enough so you can make your own decision (which is why I’m assuming you are reading this post or this series). In short, do not fall into the debt trap, where the average payday borrower finds themselves in. That person, on average, will take out 8 to 12 quick payday loans each year. In other words, they are simply extending loans and taking out new loans to pay off old ones, and they are killing themselves financially because of that.
However, does this mean that such cash loans are bad and evil? No, this doesn’t. The fact is that many bad credit lenders would not have access to capital if payday lenders are not allowed to lend or if the rates they charge are capped. Who would be able to lend to someone with bad credit based solely on their word and a post-dated check that they would get their money back? There is no way that someone could make a living doing this at normal interest rates – the defaults are simply too high, and the risk is simply to great.
Summary:
So what does all of this mean? It means that you, as a borrower, need to educate yourself and make your own decision, even though the government is trying to do so for you. As such, make your decision wisely to ensure that you do not find yourself trapped financially like many other borrowers.