Payday loans carry exorbitant annualized interest rates, however they still may be less expensive than not having them. It seems hypocritical to slam payday loan businesses when they really aren’t the problem.

In other words, if legislators cap the fees on short-term loans or bounced check fees, then lenders and banks simply stop offering credit to a large segment of the market. This is not a solution, as persons living paycheck to paycheck will resort to “unregulated” lenders. Prohibition failed in other arenas, driving people to unscrupulous providers, and the same occurs when legislators outlaw payday loans. Typically, when states eliminate payday lending, the consumers turn to unregulated foreign-based Internet payday lenders, as their only alternative to bounced check fees and utility restart fees.

See the following article from the Federal Reserve Board regarding How Households Fare after Payday Credit Bans, for more information: http://www.newyorkfed.org/research/staff_reports/sr309.html . It would be far better to regulate and monitor short term loans, and to find ways to encourage competition, then to simply legislate these consumers into the hands of unregulated offshore Internet lenders.

And have you seen your banks list of fees? My bank (Wells Fargo) charges $2.50 to use some on else’s ATM. That’s on top of the amount the ATM’s owner charges. How about fees for late payments or bounced checks? Or stop-payment fees, fees for internet bill paying? Fees for dropping below a certain minimum balance? It goes on and on. To me, it’s not that clear cut.

Anyone whose every bounced a check (average fee is $27.40) or paid a credit card bill late ($39) or had overdraft protection kick in ($29) should clearly understand a reasonable person would use a payday loan ($15 per $100).

Education is the only way to break these people of their habits, but even then only a small percentage will actually learn.

H&R Block have taken this approach with their Emerald Card. It’s a bank card handled by H&R Block Bank that provides a spending (debit) account, savings account (4.0%APY), and a line of credit. All can be used without a credit check (the line of credit is available up to the amount in the savings account). The goal is to have lower income workers load the card by direct deposit (available both for their refunds and paychecks). This is all well and good if the client doesn’t need to use any of our other banking options such as RAC’s and RAL’s whihc have additional fees in addition to our filing fees.

I know there is a general consensus to hate H&R Block, though there are associates that do their best to lead their clients into better habits regarding their personal finances. I have forgone quite a bit of commision by trying to get my clients to understand that waiting for the government to send you your refund is much better than taking a RAC or RAL (which may have 40+% interest rates). If they don’t have accounts with another bank I also tey to get them to understand the savings they can recieve by not cashing their checks at a check cashing place, but rather load the card (free) and then head to the local grocery store and request cash back on their purchases (also free).

I’ve personally have not moved a single card, though I have managed to get people to relax their time constraint on how quickly they recieve their funds. I try to help people understand the benefits of saving whenever I can and to the best of my ability (I am not employed as a financial planner by H&R Block, so I am in violation of my contract by providing too much advice, rather than refering them to H&R Block’s advisors), since most of Block’s clients are coming in because they need the refund immediately to pay off bills.