Payday Loans Aren’t a Problem, Student Loans Are


Adam Erickson, Contributor

I think most can agree that when it comes to borrowing money—and lending it, for that matter—everybody should be treated fairly.

Recently, various politicians across the country have been going after payday lenders by calling for capping loan interest rates at 36% or even as low as 15%. in some cases, politicians have moved to revoke and ban business licenses for payday lenders altogether. Their motivation is to prevent consumers from taking on unsurmountable debt. Though well-intentioned, policies to cap interest rates would make payday lenders unprofitable and thereby eliminate what is often the only source of available credit for many Americans.

Instead of attacking the payday loan industry, which hardly any actual consumers are complaining about, policymakers should focus on what is a true debt crisis in America: Student loans. Why do policymakers ignore student debt and focus on payday lending? It’s politics. Payday lending offers easy soundbites about interest rates and vulnerable consumers; student loans sound like they serve a noble purpose for upwardly mobile youth.

What exactly are payday lenders, and why are so many politicians pushing to restrict them? A payday loan is a small-dollar loan ranging from $50 to $1,000 with the average being $350, according to Borrowers pay back the loan in full, plus the interest rate, usually within 14 days.

These types of loans are usually taken out by individuals who are short on cash and need money for an expense before their next paycheck—individuals who, without this credit, would otherwise be unable to afford an unexpected expense. Four in ten Americans lack the savings to cover an emergency expense of $400, according the Federal Reserve Bank. Some examples: a necessary car repair, a medical emergency, or a security deposit on a new apartment.

Some policymakers claim that payday lenders are predatory in nature, taking advantage of people in need. Chase Carlisle, a Memphis, Tennessee, city councilman who recently sponsored a resolution to ban payday lenders claims, “People need help, and these lenders take advantage, so we need to do what we can to remove them from our community.”

Carlisle is right about one thing: People do need help. Yet much of the time, the only financial help they can get is from a payday lender. In fact, 42% of people have non-prime credit scores and thus often rely on alternative forms of credit. For these consumers, payday loans provide privacy, speed, convenience, and flexibility.

The keys to good consumer financial policy are inclusion, access, innovation, and strong regulation—not restrictions—for the 42% of non-prime-credit-rated Americans.

It should be noted that payday lending often serves as a vehicle for people with non-prime credit scores to establish or raise their credit scores—a benefit that provides longer-term dignity and goes beyond the short-term need to pay the bills.

Policymakers’ stated goal of preventing consumers from experiencing financial hardships and debt, if genuine, is a noble one. The fact is, however, that this is debt that consumers take on with eyes wide open, as grown adults—payday borrowers understand very clearly what they are taking on for a short, foreseeable period. Thus, they should be capable of making their own informed decisions based on their specific needs, without government limiting their credit options.

The irony of it all is that lawmakers are spending so much time and energy on short-term personal loans that they completely ignore the elephant in the room and the real problem they should be addressing: student loans.

Unlike the payday loan market, in which borrowers know exactly how much they need and exactly how much they will need to pay back in a matter of weeks, the student loan market, which has few restrictions, serves consumers who often take on loans blindly and have no experience with debt.

Student loans are taken out by arguably the most ignorant group of consumers in the country: College students. Being one myself, I can attest to this. Way too often, college students take on enormous debt without being properly informed about the decision. Honestly, student loans are consumer credit products that are most used to take advantage of people.

Although interest rates for payday loans seem high at 36%, it actually doesn’t add up to whole lot, as the interest is accumulated over only a matter of weeks. Student loan debt, however, accumulates over many years—sometimes decades. The total interest over the life of a student loan for an undergraduate is typically well over 100% and can often be as high as 300%. Students rarely think about the overall lifetime cost of a loan because the repayment seems so far in the future.

To compare the two issues further, student loan debt is now at $1.6 trillion, according to CNBC, and 44 million Americans are burdened by this debt. On the other hand, 15 million Americans use small-dollar loans, with a total debt load that is absolutely dwarfed by student loan debt.

This is not to say that policymakers need to focus on eliminating student loans or that student loans are a bad thing, because, again, inclusion and access are important keys to all good consumer financial policies.

Thus, policymakers should ensure access to all types of loans, including payday loans, and shift some energy towards alleviating the student debt crisis.