Payday Lending - The Best of Intentions, The Worst of Outcomes

Imagine a working-class couple with marginal credit living paycheck to paycheck. They can barely afford to make the minimum payment on a $1,500 credit card balance left over from an auto repair bill. At 18 percent, that debt will cost them $3,365 over sixteen years.

But then the husband is injured and can’t work for several weeks, meaning they’ll have to make do on the wife’s income. When it comes time to make the next credit card payment they haven’t got enough cash in their checking account to cover the amount due – and won’t until the following Friday’s paycheck. Which means they have a couple of options.

They can send the check, hoping it doesn’t clear until the funds are deposited. This would be the “wishful thinking” approach. If it works, all is fine. But if it doesn’t, they’ll get dinged for $29 by their bank, another $29 by the credit card company and likely see their credit card interest rate soar to 24.99 percent, meaning it will now take 33 years and $7,500 – or $4,100 more than before – to pay off their balance.

Of course, they can take the “head-in-the-sand” approach, withholding payment until they have the funds, in which case they’ll save the bounced check fee but suffer all the other expenses, including a damaged credit score.

Or, they can pay fifteen dollars for a $100 payday loan, make the credit card payment, then repay the loan when the next check comes in.

Now some might wonder why not ask family or friends for the cash, but for many, life is not that simple. Truth is, people in such situations are often surrounded by others who suffer similar financial difficulties and thus haven’t got money to lend. Or they feel embarrassed asking for cash, and therefore feel more comfortable taking it from strangers who ask few questions.

Unfortunately, because some fall into a payday lending trap, we want to limit that option for everyone, which is exactly what will happen if Ohio’s pending payday lending reform makes such lending unprofitable. The result will likely be even greater debt, worse credit scores and more frequent bankruptcy. In fact, a study by the New York Federal Reserve has shown that to be precisely what has happened in states where payday lending has been curtailed. And if you consider the all-too-familiar scenario outlined above, it becomes clear just how that happens.

I once owned a small business where employees regularly requested advances on their paychecks because they had rent, utility or car payments due. And by due, I mean “they’re turning my lights off tonight” due. When I asked other business owners how they handled such requests, they said they didn't. Which means their folks had to rely on faceless payday lenders. The pending reform will take that option away, effectively turning out their lights. That seems a strange way to show how much we care, but that’s what happens when we don’t consider all the ramifications of our good intentions.