Monday, February 11, 2008

Payroll Advance Agencies a bad thing?

Once again some state legislators have decided to protect us from ourselves. Rep. Bill Batchelder, R-Medina Rep. Robert Hagan, D-Youngstown are cosponsoring a bill that will put the numerous payroll lending agencies in the State of Ohio out of business.

Now on the surface some look at payroll advance industry with a critical eye. They spout facts like the annualized interest rate charged. The fact is these loans are for two weeks the rate charged does not compare to interest rates charged by banks and credit cards for long-term borrowing.

Its simple math, someone with no credit check without a long application process that has no other options to get cash in an emergency can do so at these businesses usually in a matter of minutes. Besides the cost of funds that banks and other lenders have, these businesses not surprisingly have huge default rates and collections costs. It could cost these businesses on the average of $13,85 per 100 dollars they lend. The current law only allows them to charge $15 in interest. $1.15 isn’t exactly exorbitant profit.

These agencies are meant for and needed by people to get short-term cash. Not as a way of ongoing financial survival. Do people misuse these agencies and put them selves in deeper debt? Yes some do. But eating fast food every day can make one obese and have medical issues too, should we outlaw McDonalds?

No one that gets a cash advance at any of these businesses are mislead in any way. The rate charged is clearly displayed not only on several signs throughout the place but on contracts and on the check they write in order to get the loan. In fact the complaints to the state agency that regulates such companies are practically nil. So where exactly is the problem? We are attempting to protect people who are not asking for protection once again.

These companies thrive for one reason. There is a need. Those of us with credit and with savings, have no clue how difficult it is to survive in this economy without them. By eliminating these companies we aren’t protecting anyone, we are instead making it harder for many to survive financially in the case of a short-term cash emergency. You want to solve this problem how about reducing the need for these agencies. Find ways to help people get credit, fight poverty, and educate people in personal finance.

Once again as with many “protection” laws, this will restrict severely if not put out of business a lawful industry to be no doubt replaced by an unlawful ones. Criminals with the tendency to break legs as a collection tactic will love to lend these people money.

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