A New Year’s Resolution for Payday Loan Users
In a column on New Year’s resolutions, one writer offered some decidedly off-beat suggestions about how readers could make “sounder” financial decisions. Rebecca Sheppard writes for Benzinga, a website that describes itself as a “dynamic and innovative financial media outlet,” that “provides timely, actionable ideas that help users navigate even the most uncertain and volatile markets – in real-time with an unmatched caliber.”
In the piece, Sheppard noted that the New Year can be a difficult time to develop new money-management habits. “Holiday spending often leaves many in uncomfortable positions,” she wrote, “especially if nickel-and-dime budgeting is not a personal forte.”
And what does that mean in terms of the kind of actionable ideas that her website specializes in? According to Sheppard, it means consumers who are facing an emergency expense or unplanned bill, or nickel-and-dime budgeting as she calls it, should “avoid payday loans.”
“Often advertising too-good-to-be-true promises, payday advance loan companies feed upon the desperate and those in search of a momentary (vs. permanent) fix.”
Payday Loans Provide Quick Cash and a Simple and Convenient Borrowing Process
There are a number of problems with that statement. First, it’s hard to see what Sheppard means by the promises that payday lenders make that are supposedly too good to be true. Take a look at the website of a reputable lender. What you’ll typically see is an offer of cash that, compared to what a borrower would encounter at a more traditional lender, comes with a simple and quick application procedure and a rapid turnaround time for the availability of funds. What you won’t see are any guarantees of loan approval, loan amounts, or anything that might be taken as a promise that’s too good to be true. Furthermore, any lender who would make such guarantees would be facing the wrath of government regulators in very short order.
Payday Lenders Are There for Consumers Who are Tight on Cash
Second, payday loan providers undoubtedly serve consumers who are in difficult circumstances, consumers who have historically been underserved or entirely ignored by banks and other more mainstream lenders. Sheppard calls this feeding on the desperate. But if helping consumers in their time of need is a form of exploitation, as Sheppard claims, then doesn’t that make medical doctors, auto mechanics, and appliance-repair technicians (all of whom wouldn’t be in business if people didn’t get sick, break down, and lack heat) just as guilty as payday loan companies?
Payday Loans are a Short-Term Solution
Finally, Sheppard takes exception with payday lenders for only offering a temporary financial solution and not a permanent one. But payday loans are intended to act as financial triage, so to speak, and not ongoing financial therapy. Payday loans work well when used as they’re intended to be used. Consumers who need long-term financial solutions are advised to look elsewhere for help.
Nowhere in her article does Sheppard deny that millions of Americans every year require short-term financial solutions, such as payday loans, or she wouldn’t have written an article telling potential borrowers to shun payday loans.
Three Non-Alternatives to Payday Loans
In place of payday loans she advises her readers to consider using one of the three products she presents as viable alternatives: credit union loans, unsecured personal loans, and personal lines of credit.
But are these truly workable and reliable solutions for the majority of payday loans users?
Problems with Lines of Credit and Personal Loans for Payday Borrowers
Personal lines of credit and unsecured personal loans typically require applicants to have good credit, something that would make them beyond the reach of many payday loan customers. Sheppard states that personal loans “are typically available to those with high credit scores.” It may be the case that she doesn’t realize that one of the main attractions of payday lenders is that they are willing to work with applicants who have less-than-perfect credit.
Credit Union Loans Don’t Fit the Bill for Users of Standard Payday Loans
As for the payday loan substitutes offered by credit unions, they are just as problematic. As a study of credit union payday loans published by the University of California showed, payday loan users find these loans unattractive for a variety of reasons. Some of them were:
- Few credit unions offer payday loans
- Many credit unions think payday loans aren’t worth the risk
- Credit union loans may not be any less expensive than payday loans when the overall cost of the loan is considered
- Credit union payday loans don’t offer many of the loan features that payday loan borrowers value the most
- Credit union loans come with eligibility requirements that form a barrier to borrowing for many payday loan customers
Payday Loans Aren’t Meant to Relieve Minor Financial Discomfort
Even though she recommends alternatives that clearly won’t work for many, if not most, payday loan borrowers, Sheppard comments that “Whatever method is chosen to ease minor financial discomfort, take the time to explore all options and compare the long-term implications before prematurely digging yourself deeper into unnecessary, near-impossible-to-repay debt.”
She doesn’t seem to understand that consumers who are tight for cash don’t come to payday lenders because they’re experiencing “minor financial discomfort.” People come to payday lenders to plug a hole in their budgets until their next payday, and thus they require a dependable solution that fits their circumstances.