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Payday lending and consumer access to credit: will the practice survive?

Article Excerpt
Charles Dickens was not thinking about payday lenders when he wrote about "the best of times" and "the worst of times," but had he been doing so, this particular turn of phrase would have accurately described the state of the payday lending industry today. From its relatively modest big-city neighborhood origins to its current national profile and reach, including a number of nationwide financial firms engaged exclusively or predominantly in payday lending, the industry has benefited from rapid growth and an embedded high-profit business model in becoming a $40 billion per year industry--good times, indeed. On the other side of the ledger, however, the payday lending industry has been the subject of what can only be described as a regulatory gang-tackling at the federal level, an increased incidence of tough state payday loan laws, and a continuing hostile public relations offensive by leading consumer groups--certainly some bad times. And, behind the debate over payday lending there are some entrenched regulatory and public interest attitudes that are likely to prolong the intensity of the public discussion and throw a shadow over the continued expansion of this industry, which is a promise of interesting times for the foreseeable future.

What is Payday Lending?

Payday lending, also known as payday advance, is the popular name for what is more formally referred to as "deferred check presentment lending." In its basic--and predominant--form, a payday loan is a short-term, unsecured loan in a relatively small amount (generally under $500) that is made on the strength of a borrower's postdated check and a regular job. For the use of this money for a short time period, the borrower will pay the payday lender a fee (frequently in the range of $15 per $100 borrowed). A payday loan usually is made for no more than two or three weeks, and is supposed to enable customers to meet short-term cash-flow demands until their next cash infusion--usually their next payday (hence the name). If the customer cannot repay the loan when it is due, the lender may cash...

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