I am always intrigued by plumbers. I admit I'm not much of a handyman myself but I always felt that I was familiar enough with tools that I could look at one and immediately assess its value and usefulness. But whenever I have an emergency at home where I need to call a plumber, he invariably comes up with a new weird-looking tool that I never saw before. Sometimes I ask him the name of the tool but I can never remember his answer because all I am thinking about is how something so awkward could possibly serve a useful purpose. And more often than not, I am pleasantly surprised when I see that the plumber knows exactly how to put the tool to use so that my dreaded emergency gets solved!
I thought about plumbers recently while I was reading an article about the payday lending industry. There's been quite a debate going on about payday loans and whether they are good or evil. There are good arguments on both sides and after reading many of the pros and cons, it struck me that just about all the arguments I saw on both sides were valid. I really did not disagree with any of the arguments themselves, only with the conclusions. I began to realize that payday lending is neither good nor evil; it is merely an awkward-looking tool. If used the right way, it can solve the right emergency. If not, then it can be very useless.
Payday loans are intended as short term credit loans. If used as intended, they can be the best way to fix a temporary financial hardship. However they can also be easily abused. For one thing, it is important to pay them off promptly. Rolling them over several times can turn a good tool into a bad one quickly. Also, when considering a payday loan, it is of utmost importance that the borrower deals with an ethical and trusted lender. Payday loans are best if you need between $100-$1500 very quickly, you can pay it back in a short period of time (2 weeks or less) and the loan will help you avoid credit card fees, bank overdrafts and taking your possessions to a pawn shop.
Payday lending exists because it provides the kind of tool that can't be found elsewhere. In these days of foreclosures, bad economic times and disappearing credit, there is sometimes a need for a very quick emergency borrowing option that doesn't entail the very high fees charged by banks and credit cards.
However there are many that feel that payday lending should be restricted. Professor Todd J. Zywicki of George Mason University, in a 2009 paper entitled "The Case against New Restrictions on Payday Lending", spoke out against placing restrictions on payday lending, arguing that "misguided paternalistic regulation that deprives consumers of access to payday loans would likely force many of them to turn to even more expensive lenders or to do without emergency funds". And along the same lines, Dr J. R. Clark, University of Tennessee Chattanooga, writing in the September 2, 2008 issue of Exchange Magazine, points out that "there is significant academic and market evidence that high-interest lending such as payday loans, despite their considerable - some would say astronomical - expense, increases the welfare of borrowers. Predatory loans, on the other hand, are loans obtained by the lender through deception or fraud, and do not enhance the welfare of borrowers. It is a disservice to the public to confuse loans which are truly predatory with those that are simply expensive."
What type of consumer makes the most use of payday loans? Contrary to a common perception that payday lenders target the poor, recent findings seem to indicate that payday loans are attracting more "middle class" customers. Marketing research data published by Comscore in its July 2010 issue of ComScore Marketer showed that "the largest percentage of (individuals seeking short-term credit on the internet) earn between $50k-$74k."
The next time I think about payday lending, I am going to put the subject in its proper perspective by remembering my plumber and his tools. The tools do not exist so that I can love them or hate them. They exist so that a very specific problem can be solved. For that purpose they are wonderful. For any other purpose they are useless. A payday loan is the awkward-looking tool that I can call upon if and when I really need it. And just like the plumber, I am the one in control; if I know how to use it wisely, then I can definitely make it work to my advantage.
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