Should short-term lenders, aka payday lenders, be prohibited?

Introduction
Payday lending has increasingly become common in the modern-day world primarily because it is supposedly the most accessible and convenient line of credit (Bennett, 2019 and Packman, 2014). According to Cackley (2011), a payday loan describes a single payment, short-term loan often based on a personal check held for electronic access or future deposit to a personal checking account. Alternatively, payday loans refer to the provision of a small-sum cash advance usually marketed on a short-term basis, not backed by collateral (UK Gov. Competition Commission, n.d.). These loans include, but not limited to, credit repayable once the month ends or during the borrower’s next payday. Payday loans do not cover credit cards, home credit loan agreements, overdrafts, and credit unions (UK Gov. Competition Commission, n.d.). Payday loans originated in the 19th century in the U.S. due to a large proportion of employers delaying salaries and wages until a regularly scheduled paycheck was issued. The average salaried or wage-earning American required immediate funds, hence could not wait for the pendent paycheck. According to Opportunity Financial, LLC. (2019), workers were provided with the opportunity to purchase a percentage of their paycheck. However, a rate of between 10 and 33% of the loan amount was applied. The underlying condition was that the employee was to pay the advance in full upon the receipt of their next paycheck (Opportunity Financial, LLC, 2019). Such a steep repayment generated immense hardship for those seeking the loans. This, then, resulted in an indefinite repeat of the cycle, with a 240% interest rate. By the early 1920s, salary buying became a norm starting in the north and then south of the the U.S. Meanwhile, loan sharks were emerging motivated by the idea of filling the pay gaps with high-interest lines of credit along with antisocial repayment mechanism including violence and property seizure (Hubachek, 1941). Today, the extent of the payday loans market has burgeoned. At present, the U.S. payday market is worth $40 billion (The Economist, 2017). At least 2.5 million American households, which means one in every 50 households, habitually use payday loans each year. A typical American payday loan is $350 lasting for two weeks. This credit costs $15 for every $100 borrowed (The Economist, 2017, par. 3). The scenario is relatively the same in the United Kingdom. The Financial Conduct Authority (2019, par. 2) claims that between January and June 2018, the level of payday loans made was worth more than 5.4 million pounds. Additionally, the agency reported that on average, the UK borrowers were due to repay at least 1.65 times the loans advanced to them (Financial Conduct Authority, 2019, par. 2). The Northwest UK had the highest number of payday loans advanced. In every 1,000 people, 125 had taken short-term credit advances. In these two nations, payday loans are controversial, given the intense debate on whether or not they should be prohibited. This paper will document the positives and negative aspects of prohibiting payday lenders.

Positive aspects of prohibiting payday lenders

Curbing chronic borrowing
Prohibiting payday lenders is crucial as it would curb the problem of chronic borrowing. Stegman and Faris (2003) define chronic borrowing as stringing one payday loan after another together to make up the deficit until the next benefit payment or paycheck arrives. This problem mainly arises due to roll over, which refers to renewing a short-term loan for another when a borrower cannot repay a loan by paying another fee. Stegman and Faris (2003) claim that payday businesses request borrowers to take out a new short-term loan by paying a new fee and writing yet another check. Alternatively, the payday lenders take a cash settlement for the existing payday loan. They then re-loan the payoff as a newly issued credit advance. The outcome of the case Janet Livingston v. Fast Cash USA Inc gave rise to this rule. Therefore, regardless that payday lenders label the repeat transactions as “extensions,” “renewals,” or “new loans,” as labelled by the FDIC (n.d.), the fact remain that these investors often trigger a continuous flow of interest-only payments at a significantly short intervals that never mitigate the level of the principal. The problem with chronic payday loan borrowing is that the borrowers tend to find themselves overly indebted, hence bankruptcy filings (Agarwal, Gross, and Mazumder, 2016, Rich, 2013, and Skiba and Tobacman, 2011). Therefore, they often find that what they owe exceeds the amount they borrowed originally after just a few rollovers within less than a year. Besides, Riccobono (2000) avers that the triple-digit annual payday loan rates (APRs) charged by payday lenders usually go well beyond what is deemed as fair. At the same time, the Riccobono (2000) expresses that the exaggerated APRs are predatory and abusive because they cause repeated borrowing. Therefore, prohibiting the payday lenders will help in decreasing the problem of chronic borrowing, and the underlying dynamics.

Safeguarding the at-risk populations
Prohibiting payday loans is crucial as it may help to protect the at-risk population. According to Graves and Peterson (2005), the at-risk population in the context of payday loans refers to the financially vulnerable populations, especially the low-income earners along with the minority groups. Allen (2009), Kutz (2008), Raskin and Squires (2012), and Sharon and Elaine (2005) all agree that this population is usually the predominant target for the payday loan lenders. However, Martin and Longa (2012) and Kurban, Diagne, and Otabor (‎2014) also state that middle-class people are a target of the payday loans. Indeed, the presence of these types of lenders is the highest in regions where poor and minority communities reside relative to the affluent areas. In fact, payday lenders are more likely to infiltrate neighborhoods with moderate poverty levels, low income, and many immigrants (Gallmeyer and Roberts, 2009). These lenders will also concentrate on ethnic minorities, young adults, military personnel, senior citizens, and those working in non-management professions.

Furthermore, Gallmeyer and Roberts (2009) claim that payday lenders offer much-needed services to often alienated or underserved communities. Nonetheless, their presence in these locations marks grave financial hazards to the communities. Thus, the vulnerable communities will expectedly suffer the full range of inefficiencies created by payday lenders ranging from chronic borrowing to excessive interest rates. However, if payday loans are prohibited, the vulnerable communities will have the predisposition towards the normal lending arrangements. Consequently, they will access loans characterized by better terms and conditions. Thus, this will then place them within the same spectrum as the affluent and majority communities who have been using the conventional loan market.

Addressing the inappropriate collection practices
Prohibiting payday lenders is crucial since it will help address the inappropriate collection practices often employed by these companies. Johnson (2002) express that the collection methods employed by payday lenders tend to subject the borrowers to horrific experiences. Johnson (2002) confers that the CFSA, which abbreviates the Community Financial Services Association of America, holds out that the payday lenders must pledge to follow suitable collection practices. Additionally, the Fair Debt Collection Practices states that all lenders, including the payday lenders, must follow fair, lawful, and professional methods when collecting debts (FTC, 2019). Hence, they should never apply threats, intimidation, or harassment. Similarly, the policies stipulate that lenders should desist from seeking

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