Loan vehicles, or so-called “payday loans” are highly singular animals. Largely unregulated by federal authorities, an industry comprised of lenders has sprung up across the country, including participants in Texas.
There is certainly a wide divide existing in the opinions of industry commentators regarding the particulars of such loan instruments. On the one hand, and as noted in a recent media overview discussing payday loans, they have been termed “scams” by consumer groups. On the other hand, a spokesperson for the country’s biggest payday lending outfit calls them “a viable credit option.”
It might be useful to think of a payday loan as synonymous with a burning match held between the fingers of a cold person in the woods. That individual might be able use the match in a timely and effective manner by quickly lighting a fire. Conversely, of course, holding onto the match for too long yields another result entirely; it renders the person who would profit from its use a victim by burning indiscriminately.
Many readers might think that federal regulators can control the worst-case results stemming from payday loans by mandating ceilings on interest rates.
Unfortunately, they lack that power. Only state authorities can do that, and many of them don’t put a high priority on policing such loans.
A person can get into trouble quickly by taking out such a loan. The coverage period is often short, with a loan contract calling for repayment of the principal and an interest charge. The problem for many borrowers is that they can’t make full payment on time and need to take out one or several additional loans. Those bring extra charges, of course, resulting in an ugly cycle of escalating repayments.
The federal Consumer Financial Protection Bureau is strongly focused upon the industry and has stated that it might begin to play a greater oversight role this year.
Although the CFPB cannot adjust loan interest rates, it can take a number of other consumer-protective actions.
In the meantime, the industry charges along. Consumers availing themselves of its product might want to keep a match in their pockets to remind themselves that payday loans can start fires as well as put them out.