Payday loans have a bad rap.

With triple-digit annual percentage rates and exceedingly abbreviated terms (the full value of the loan is typically drafted from a borrower’s bank account immediately following payroll deposit), hapless consumer-debtors often find themselves stuck in an endless cycle of costly renewals that amount to death by a thousand cuts.

A handful of states and the Consumer Financial Protection Bureau are attempting to tackle these problems by enacting laws and devising regulations that limit interest rates, fees and the number of successive loan rollovers—and even requiring some honest-to-goodness credit underwriting (a paystub is normally all that’s needed to qualify for these loans). No doubt a good portion of the 12 million consumers who rely on this method of financing worry that doing so will limit its availability.

The fundamental problem, however, isn’t so much the amount that’s charged as it is how quickly the money has to be repaid.

I say that because to the typical customer—an unbanked (no depository relationship) or underbanked (no credit relationship) consumer of uncertain financial literacy—parting with $50 from a $500 paycheck in exchange for $450 worth of cash-in-a-hurry isn’t hard to rationalize. Also, that same upfront charge happens to represent the only way that a lender has to recover in so brief a period the costs it incurs to originate, settle and profit from loans that present a higher-than-average risk of default.

Of course, the thought of paying 10% on a loan that will be outstanding for only one week or two weeks (the simple APR equivalent for that is 520% and 260%, respectively) is repellant to those who don’t share the same dire financial circumstances. But for those who haven’t the choice, it would help if the repayment term was longer and remittances were made in equal periodic installments.

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Mitchell D. Weiss

Mitchell D. Weiss is an experienced financial services industry executive and entrepreneur. He is an Executive-in-Residence at the University of Hartford, co-founder of the university’s Center for Personal Financial Responsibility and adjunct faculty at Rutgers University as well. His books include Life Happens: A Practical Course on Personal Finance from College to Career, Business Happens: A Practical Guide to Entrepreneurial Finance for Small Businesses and Professional Practices and Practical Finance: A Straightforward Guide to Personal and Entrepreneurial Finance, all of which are undergraduate courses that he teaches at the aforementioned schools and elsewhere.
Mitchell D. Weiss
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