Deregulation And The Rebirth Of An Industry

Good Essays

I. Deregulation and the Rebirth of an Industry Before the 1980s you couldn’t find many payday lenders, if a person was short on cash and needed it immediately they had to go their local pawn shop, or if incredibly desperate a loan shark. The pawn shop provided a pay-it-back or lose it system which left people without their personal effects, but they were free from debt. The loan shark on the other hand charged extremely-high interest rates, and usually under illegal conditions. Both of these options provided struggling Americans with short-term financing, a simple solution that will help them solve the liquidity problems. Much like a bank who received loans from other banks when they run into liquidity issues, people should have access to …show more content…

Take out the loan and pay it back with your next paycheck. On the surface it sounds like an appealing alternative not having electricity or food for the week. The downside comes in the fine print. According to Check Into Cash’s website, a single payment $100 loan can result in 260.71% to 782.14% in interest. I may just be a college student, but I can see that this kind of lending is both predatory and nearly impossible to repay. This is why payday lenders are often referred to as “predatory”, because they prey on the short-term needs of their clients to create long-term returns that in many cases never go away. As mentioned earlier, this is not a phenomenon of the late 20th century, rather it is merely a rebirth of an industry that thrived during the Great Depression. During the Great Depression loan sharks charged from 240% to 1000% for short-term loans, sound familiar? When the interest rates are this high they are referred to as “the purchase of wages” because what the institution is effectively doing is purchasing the future wages through this high interest rate. This begs the question, why do they exist, what economist world view calls this mode of financing productive and fair to the markets, what are the benefits?
III. The Benefits to Payday Lending There must be some benefits to payday loans, why else would have legislation passed that allowed banks to charge their interest rate of choice. Payday loan advocates argue that the interest rates are not nearly

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