Cash advance loan customers often turn to these stores as a last resort

The payday loan business is thriving and is growing faster than anyone could have predicted several years ago. There are now more cash advance loan stores nationwide than there are McDonald’s, Burger King and Subway restaurants combined. That’s a lot of stores. And the industry has come under a lot of fire recently because the interest rates charged for payday loans are at best usurious and at worst, predatory. There’s little else that can be used to describe interest rates that usually exceed 400% annually.

The industry defends its position, pointing out that A) they are selling convenience and B) the interest rates they charge aren’t really interest, they are fees and C) the loans are for periods of two weeks, not a year, so the annual rate is moot. These arguments can be debated at length, but the loans remain popular despite laws that require that the lender disclose all of the terms in writing. The one thing that the lenders argue that probably doesn’t hold water is the statement that their typical customer is not poor, but rather a member of the middle class who just borrows from them for convenience.

Studies suggest otherwise. A recent study conducted in Arkansas paints a decidedly different picture from the rosy one suggested by the quick cash industry:

• According to the survey, half of the respondents said that they applied for a bank loan prior to obtaining a payday loan but were denied due to a history of bad credit.
• More than three quarters of borrowers did so because they were receiving threatening calls from creditors to whom they owe money.
• Two thirds of respondents said they took out a cash advance loan because they simply had no alternative.

This strongly suggests that the primary beneficiaries of these loans are indeed the working poor. Not only that, but they do not take out these loans because they are convenient, but because they are literally the only opportunity to borrow cash to pay bills or survive until the next paycheck. It’s a pretty sad situation when the only available source some people have to borrow money is one that charges a minimum of 400% per year.

The market continues to determine whether or not these business will continue to operate. After all, if no one wanted these products, no one would buy them. In the meantime, legislators in many states continue to try to find solutions that will allow these taxpaying businesses to stay while protecting the consumers who clearly have no other place to turn. There is no simple solution, as the legislators in South Dakota have discovered. They set up loose banking laws to bring banks to the state, only to see quick cash stores pop up on every street corner. Clearly, loose banking regulation is a double edged sword.

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