Payday lending companies fill consumer demand

Members of the Missouri General Assembly have introduced bills to further regulate the growing payday loan industry in the state, but controversy still surrounds the movement to standardize these businesses.

Missouri is home to 1,644 payday loan stores that charge an average annual percentage rate (APR) of 422 percent for short-term cash loans, according to a March 11 Columbia Daily Tribune article. New legislation would cap this annual rate at 36 percent, a move that would essentially eliminate payday loans in the state, according to the article.

Tony Garrett, manager of the Kirksville Advance America Cash Advance, said his company serves 150 to 200 customers at any given time. He said that despite the current payday loan debate, he thinks his business addresses a consumer need.

"I think we're here for a reason, and I think that some people abuse that privilege," Garrett said. "[But] there are some people that know the system and use it to the best of their abilities."

He said his customers use payday loans to pay for unexpected expenses like car repairs, travel and past-due bills.

"Sometimes you need money and don't have the cash for it right then, and if you go [to a bank], it could take you two to three days to get a loan," Garrett said. "With us, it's a same-day process."

"I wouldn't have been able to give my son a Christmas"

An Advance America Cash Advance customer who asked to remain anonymous said she used payday loans to make ends meet while raising her 3-year-old son. A single mother, employee and full-time student at Moberly Area Community College, she said she turned to payday loans to afford car payments,gas, rent and groceries.

"In order to stay afloat, I had to [take out a payday loan]," she said. "I didn't want to, but I had to."

She said the high interest on payday loans is problematic, but the loans allowed her to pay for things she couldn't afford otherwise.

"I'm glad they're there or else I wouldn't have been able to give my son a Christmas," she said. "… I don't think they'd actually have these places if people didn't need help."

Steve Smith, professor of economics and business law, said the number of payday loan companies indicates a demand for their services. But he said opposition to payday loan operations arises because of high interest rates and the idea that the industry is "making a killing."

"Frankly, also I think another reason you get opposition to payday loan places is because it's good theater for a politician," Smith said. "... There's nothing better for a politician than to be able to pose - this is a somewhat cynical view, perhaps ­- but to be able to pose as the protector of the little guy against big bad business."

Smith said that although new legislation might help many individuals, it might also prevent some from getting the loans they need.

"You're protecting them by basically taking an option away from them, and I don't see why that is so great," he said. "Another thing that can happen is if people are really desperate for money, they'll get a loan anyway even if you pass those caps, but they'll get it from an illegal lender."

"Just evil bastards"

Smith said that, from an economist's point of view, the payday loan industry is not big business. He said that unlike payday loan companies, more profitable industries are difficult to enter.

"What economists look at are conditions of entry," he said. "And these payday loan places, you can open them up - you know, a little teeny office with almost no rental - and it wouldn't require too much capital to go into that."

Smith also said payday loans' high interest rates could be attributed to the high-risk, unsecured nature of the loans and rates of nonpayment.

That rate of default was about 6 percent across Missouri, where people borrowed more than $786 million in payday loans last year, according to the Columbia Daily Tribune article.

Bruce Coggins, professor of economics, said payday loans play on people's financial ignorance and desperation.

"Well, [payday loan companies] are probably just evil bastards, you know, taking advantage of people that don't have any other financial means to get by," he said. "… It's like a legalized loan shark."

But Coggins said he prefers more consumer education about credit and interest payments to new legislation.

"People are less of afraid of debt than they used to be," he said. "And people expect [more]. They have an entitlement mentality about how they're supposed to live and what they're supposed to have."

Jim Turner, associate professor of accounting, said debt has become more socially acceptable.

"I think it's increasingly portrayed as another routine part of life," he said. "… Perhaps that may tend to tempt people to live a little closer to the edge of their budget. I would attribute it in part to our general consumer culture, a tendency for people to always buy the large sandwich at the fast food place."

He said the new legislation also could work to inform consumers.

"You start in putting certain limitations on, and it can be a cue to consumers to start planning to qualify themselves for other sources of credit, trim their consumption accordingly," Turner said.

He said the new legislation seems less than harsh.

"That looks like a pretty modest requirement, and I think that it's desirable," he said. "This does not look like a severe restriction on [utilizing] payday loans to me."

"A no-brainer"

According to the Center for Responsible Lending Web site, "Payday lending (sometimes called cash advance) is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan. To qualify, borrowers need only personal identification, a checking account and an income from a job or government benefits, like Social Security or disability payments."