In Defense of Payday Lending

Few industries are more reviled than payday lending, which primarily services the working poor by offering short-term loans at high interest rates. Payday customers borrow an average of $350 for a period of two weeks, or until their next paycheck comes in. The money is handed over on the spot, once the payday store can verify that the customer has a job, earns enough to afford the loan, and hasn't recently defaulted with another vendor. Payday loans are in high demand: There are 22,000 payday storefronts in the United States and in 2009 they loaned a combined $35 billion.

And yet the industry is fighting for its survival. Montana just voted to make it illegal for the payday-loan industry to operate profitably, so lenders are loading their wagons and wheeling out of "The Land of the Shining Mountains." They've already moved on from Oregon, New Hampshire, North Carolina, Arizona, Georgia, and Washington, D.C, because of similar regulations. The annualized interest on payday loans runs about 400 percent, but the reality is that payday firms see returns closer to 10 percent, or about the same as other less-demonized financial service providers.

Now there's a danger the federal government will quash the rest of the U.S. payday industry. The Frank-Dodd Financial Reform bill, passed in July, created the Consumer Financial Protection Bureau (CFPB), which posseses the power to regulate paydays at the national level for the first time. The vaguely written law doesn't allow the CFPB to cap interest rates, but regulators have the latitude to enact other rules that would obliterate profits, such as limiting the number of payday loans a customer can take out over a set period of time.

Payday critics, such as the Center for Financial Responsible Lending (which declined our interview request) argue that payday stores "trap" their customers and practice what "amounts to legal loan sharking."

Reason.tv's Nick Gillespie looks at payday loans—why people depend on them, why they're expensive, and the assumption at the core of every attack on the industry: that the working-poor are too stupid to manage their own money.

The story features payday antagonist Gary Rivlin, the author of the recent book Broke USA; George Mason law professor Todd Zywicki, who has studied paydays; and Greg Fay and Saran Goubeaux of Hometown Cash Finance, a small chain of payday stores in Ohio.

Two studies are citied in this story: the Federal Reserve's 2007 look at the effect of booting paydays out of George and Virginia, and the 2007 Vanderbilt-Oxford University study that reveals that, contrary to the claims of industry critics, paydays aren't exceptionally profitable.

For more info, read Katherine Mangu-Ward's October 2009 feature story on payday lending in Reason Magazine, and her Wall Street Journal review of Rivlin's Broke USA.

For complete links on this story go to:

Approximately 5 minutes.

Produced by Jim Epstein, with help from Dan Hayes, Josh Swain, and Michael Moynihan.

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