With a presidential election that ended in a never-before seen way, it is almost impossible to focus on the underlying issues.  However, the outcome of these issues represents state by state decisions that will ultimately affect thousands of Americans.  Payday loan initiatives appear quite frequently in election ballots due to their strong controversial nature.  Although debates and proposals have been given and displayed time and time again to help people understand the importance of the payday loan industry in America, it remains a negative part of our society in the eyes of some legislators and of many voters.

What is the controversy? Simply put, payday loans are illegal in 15 states nationwide and it seems that many more states are following suit. While the majority of people say it is just another money hungry industry looking to trick consumers into paying unnecessary amounts of money, some people have come to understand the purpose of the lending business.  Regrettably, the opposing side is composed of people who do not need and have never used the system and more unfortunately still, they are the vast majority of people who actually vote on these issues.  Because most payday loan institutions are centered in low-income areas of the country, many view them as illegitimate businesses.  The truth is they are there because they are needed.  Most low-income consumers depend on payday loans to pay off their pending bills or simply to make ends meet on a day-to-day basis. 

Arizona has become the most recent state to take charge against the payday loan industry.  With annual percentage rates on loans reaching over 400%, many felt the need to step in.  The truth is, the rate makes it profitable to the lender and affordable to the consumer.  Problems arose only when the loans were used inappropriately.  Many consumers misunderstood or did not follow the necessary steps to make an efficient and problem-free transaction.  People who were opposed to the industry made the argument that their late-fees were unreasonable, when they are really the same as any other sort of loan, either from a bank or a credit union.

Since payday loans in Arizona face extermination in 2010, supporters of the industry took an opportunity to fight against this in the 2008 presidential election.  Proposition 200, as it was called, offered a reasonable alternative.  It included a substantial APR cut from $17.50 to $15 for every $100 borrowed.  There would be repayment plans available and would eliminate roll-over charges if payments were not made on time. Lastly, it would only allow consumers to take out one loan at a time.  While the plea was reasonable, the bill did not pass.  40.50% voted for it while 59.50% defeated it.  Arizona’s payday loan industry faces extermination in 2010.

Over the past few years, Ohio has seen a rise in the payday loan industry, with institutions appearing in every corner of the state capital.  Earlier this year however, it became the most recent state to pass a law regarding payday loans.  The law (or Issue 5) put a 28% cap on percentage rates which, up to that point, had reached about 391%. The law also limited the amount of loans to four per year and capped payday loan institutions in relativity to Cleveland’s population. Although the initiative was said to be made with the intention to regulate the percentile rates, it has only made it impossible for the payday loan industry to exist.  With a 28% limit, there is no room for profit and because of that payday loans have slowly diminished from the state of Ohio and over 6,000 people have been left without a job.

Ohioans for Financial Freedom, a payday loan representative group centered in Cleveland, Ohio, made it a priority to change the law.  They spent over 16 million dollars and acquired 279,174 signatures to re-install Issue 5 on the 2008 presidential ballot.  Their goal was to get enough voters against the proposition and therefore re-instate the 391% APR and unlimited access to payday loans every year.  Alas, it did not pass.  64.55% of voters approved the issue, while only 35.45% defeated it.  Without a doubt, the payday loan industry will not be around for much longer in the state of Ohio.

 

There is a general misunderstanding about the payday loan industry.  Truthfully, the majority of state legislators prefer the regulation rather than the elimination of payday loans.  Their argument is that if a profitable yet reasonable agreement can be made between the industry and the rest of the country, it can be a valuable part of our society.  The result of eliminating payday loans has been seen in states like Georgia where a large majority of the low-income population depended on it.  Once eliminated, the results were outstanding; the percentage of bounced checks, overdraft fees and bankruptcy almost doubled.  This goes to show that other businesses such as banks, see payday loans as a threat to their income.  When the consumer is able to avoid problems such as bounced checks and overdraft fees, banks (who make over 25% of their profit from such problems), begin to worry.  In the end, it is a fight for the number one spot. 

Other alternatives are being looked at to replace the payday loan industry.  Legislation wishes to make small and short term loans available in banks and credit unions but it is a costly process.  Most banks do not wish to do it because the profit is not significant enough.  Also, their tight-end security would probably disqualify about 80% of the people in need for small loans.

The future of the payday loan industry doesn’t look good.  All that can be done is to educate on its true benefits and make it known that the outcome of their elimination will be a downfall in our economy.  Most problems that develop around payday loans are due to inaccurate or insufficient information about how they work.  Consumers need to make it their responsibility to understand the facts completely before making any decisions.



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