Payday loans won’t go away if limitations are put into law

The .payday loan business has boomed throughout the United States during the last five years. Largely unknown until recently and boosted by deregulation of banking laws, these businesses have turned up throughout the country at an alarming rate. Also known as cash advance loans, these businesses specialize in short-term, unsecured loans of a few hundred dollars at a time.

A typical scenario has a customer borrowing several hundred dollars for a period of two weeks, usually when a crisis finds them in need of emergency cash. They write a postdated check for the loan amount, plus a fee that typically runs between $15-20 per hundred dollars borrowed. The lender gives them the cash and at the end of two weeks, cashes the check. If the borrower cannot repay in two weeks, the loan can be renewed by having the customer pay another fee. Most states have some sort of regulation regarding the maximum amount that can be borrowed and the number of times the loan can be renewed, but eve so, the interest rates charged on such loans, when annualized, run between 400-600% per year.

Lenders have gotten around some restrictions by serving only as intermediaries for out of state banks, thus circumventing in-state restrictions on a maximum interest rate. Now Arizona, which is finding itself plagued by payday loan stores, is considering additional legislation to help solve the problem.

Among the items proposed to minimize the impact of such stores would be to limit the number of stores in a given area or to mandate a minimum distance that must be maintained between stores. That might seem, on first glance, to be a good idea. After all, if the neighborhood isn’t full of these places, then the problem goes away, right? Well, not exactly. Those who dislike these businesses rightly claim that the fees they charge are outrageous. And they are. But what brings down high prices in the marketplace? Competition! The more businesses compete for a customer’s dollar, the more likely they are to lower their rates in order to bring in more customers. And yet the state of Arizona is proposing to limit competition in order to lower the prices!

That isn’t going to work. People go to such businesses because they have a need for the products offered.. If they need them, they will find them. The fewer the number of locations, the more the businesses can charge. The proposed solution will probably make payday loans more expensive than ever, and that benefits no one.

There may be other solutions to this problem, but the solution of reducing the number of stores or keeping them a certain distance apart actually protects these businesses, rather than hurt them. It’s time to come up with a better idea.

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