Payday Loan Controversy

A large amount of controversy surrounds payday loans, and for legitimate reason. Payday loans are a form of subprime lending, similar to high interest credit cards. Critics often claim that payday lenders target the young and the poor, set up shops near military bases and low income housing, although this is not always the case. Payday lenders have been compared to loan sharks because of the high interest rates seen on these loans, but they have been defended on the grounds that they are simply providing a service that borrowers are asking for.

Proponents of payday loans state that the processing costs associated with these cash advances are the same as the costs associated with other forms of lending, as found in the mortgage and auto loan industries. Thus, not charging a higher interest rate would make it difficult for lenders to break even. Lenders also argue that the higher risk of defaulting on a loan associated with the payday loan industry makes it necessary to charge a higher interest rate, as a sort of security backing in case the loan does default, which is often the case.

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