Payday loans: They're not usury
by Lawrence Meyers
Special to The Star
Jul 03, 2008 | 4629 views |  0 comments | 34 34 recommendations | email to a friend | print
An even more terrible practice than usury is when people misuse that word when referring to a legitimate lending practice: payday loans.

The Anniston Star, in its June 23 editorial ("Prophets ignored, profits adored"), defined usury as "the practice of charging, taking or contracting to receive excessive or illegal rates of interest for money on loan." Payday loans, however, do not satisfy the conditions of this definition.

We refer to the words "illegal" and "excessive."

Thirty-eight states have laws permitting the rates charged by payday loans. Because the rate is specifically allowed, they are therefore legal. So payday loans do not fit the definition of "illegal."

"Excessive" is defined as "greatly exceeding bounds of reason or moderation." We must ask, what is "reasonable" means in the world of short-term unsecured credit?

If a lender charges a price he deems reasonable that the borrower thinks is unreasonable, the borrower will not take out the loan. After all, if lenders charged 2,600 annual percentage rate, or $100 per hundred borrowed, they would not get any customers. It's called "pricing oneself out of the market."

If the borrower wants a price he deems reasonable that the lender thinks is unreasonable, the lender will not make the loan. After all, if lenders charged 36 APR, or $1.38 per hundred borrowed, they would get many customers — but they would go out of business within a month because they would lose all their working capital at that rate.

So, we know that 2,600 percent is too high and 36 percent is too low. What is "reasonable"?

We define "reasonable" to mean "that price that both the lender and borrower agree upon so that a transaction occurs." Most call this the free market.

Over the past two decades, hundreds of millions of payday loan transactions have occurred.

Ipso facto, borrowers and lenders must both consider current rates to be reasonable, or neither side would have undertaken these transactions.

Therefore, the interest rate is reasonable, and therefore not excessive. Since the rate is neither excessive nor illegal, therefore the rate is not usurious.

End of story. Usury charge debunked.

Other falsehoods: While APR must be disclosed, Dr. Thomas Lehmann correctly asserts in his paper, "In Defense of Payday Lending", that "the real price signal to which the borrower responds is the flat fee … not the APR." The APR argument used by The Star and opponents is an emotional smokescreen used to distract people from the facts.

Other lies: The vast majority of people who take out payday loans do not end up in a "cycle of debt." The annual reports of public payday loan chains show that 93 percent of loans are paid back in full, and on time.

For those who do get caught, responsibility rests with both borrower and lender. Lenders who don't check if a borrower has multiple loans out, or who loan them more than they should, engage in irresponsible lending.

However, The Star's June 25 editorial cited borrower Wanda Champion ("On a fixed income and in a fix to lenders"), who took out multiple loans. Yet The Star failed to mention that Champion bears responsibility for making poor choices. For her to take out a loan she couldn't pay back in the first place, to run from payday lender to payday lender, and to fail to ask for payment plans, is irresponsible borrowing. It's no different than buying liquor and then drinking while driving. The consumer has the ultimate responsibility.

Finally, The Star relied on self-financed studies by the Center for Responsible Lending, a corrupt organization as evidenced by a report from the Consumer Rights League, "Predatory Charity." This group competes with payday lenders in offering loans to consumers, so its goal is to drive them out of business.

Readers are better served examining non-partisan studies, such as "Payday Holiday," a study conducted by the New York Federal Reserve, which concluded, "Compared with states where PDLs are permitted, Georgians bounced more checks, complained more to the FTC about lenders and debt collectors, and filed for Chapter 7 bankruptcy at a higher rate. North Carolinians fared the same."

The Star, however, quotes one important statistic. Nineteen million Americans used payday loans in 2006. The demand exists because the product is needed. If other profitable alternatives existed, then they would have entered the market. Considering that even the charitable Goodwill Industries offers these loans at $9.90 per hundred borrowed and can't make a profit, it is no surprise that nobody else has offered an alternative.

This should tell readers something else: the facts are not on the side of payday loan opponents.

Lawrence Meyers is president of PDL Capital, which invests in responsible PDL companies, and provides consulting and lending services for Texas CSOs. E-mail:
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Payday loans: They're not usury by Lawrence Meyers
Special to The Star

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