Tricky Times for Payday Lenders
Payday lenders have become the boogeymen of the US economy. Their increasing use as the economy struggles and the number of bad press stories about people struggling with repayments means there are plenty of people who would like to see the industry shut down for good. However, while the criticism is well-intentioned, it often misses a basic point. Payday loans can be useful in some circumstances and provide access to the economy for many who would otherwise have no access to support.
Opposing Payday Loans
The opponents of payday lending may get their wish. The Consumer Financial Protection Bureau is coming up with a new set of regulations which could severely impair the industry’s operations and perhaps even destroy it for good. That’s certainly what campaigners have been looking for. Take the campaign featuring well known celebrities such as Sarah Silverman urging people to ‘literally do anything else than take out a payday loan.”
The problem is that in some cases they can be useful and even necessary – as long as they are used in the right way.
Take the example of the UK, where recent public sector pay freezes have seen a rise in the number of public sector workers taking out payday loans. With wages struggling to keep up with inflation, this can sometimes be their only means of stretching their finances to pay day.
Fighting Bad Press
The bad press, of course, comes from stories of malpractice within the industry, aggressive collection practices and seemingly exorbitant interest rates, but such stories distort the real picture. First, there is huge variation across the payday loan industry as there is in any industry in how different players work and their ethical approach to business. Second, representations of interest rates in terms of APR distort the expense of these loans. Yes, an APR of more than 1000% seems excessive, but these loans are not meant to be taken out over a period of a year or more. Instead they are supposed to be over a few days or a week. In this light, a charge of $20 or so does not seem all that excessive.
That said, this industry can be a minefield, and there are plenty of unscrupulous players out there – those who think nothing of preying on those most vulnerable. The challenge for reputable payday lenders is to differentiate themselves against those players who bring the entire industry into disrepute. Equally, if reform of the regulatory environment is coming – in a way which hinders the operations of the worst participants – then this is something every reputable lender should welcome.
The best way to do all this is to be clear about your method of operation and what your terms of business are. If customers do get into trouble with repayments you should look at ways in which you can help them. This, in turn, will help your risk profile from the perspective of merchant account. The fewer defaulted payments you have on your books, the less of a risk you’ll appear to be – and as such the better the business terms you’ll receive from your payment processing provider.