Cash Advances

The Consumers Union, a consumer advocacy group, has been highly vocal in denouncing the practice of cash advances made through so-called payday loans as taking advantage of inexperienced and low income borrowers. They claim that these consumers do not have an understanding of how the recurring fees involved can make it difficult to escape a cycle of debt if the loans are continually renewed. A comparison is made between middle-class borrowers that may only pay as high as a 25 percent annual percentage rate (APR) for a cash advance from credit cards. However, poorer communities have to pay a much higher effective APR on payday loan cash advances.

Payday loan advocate Tom Lehman explains that payday loans, far from disadvantaging low income communities, are more of a way of "democratising credit" by making these small, un-collateralized cash advances widely available to high risk borrowers. These borrowers would otherwise be unable to obtain credit through conventional bank loans. Lehman criticises those that would seek to further regulate payday loans as interventionists, that only want to quench this creative approach of providing loans to poor communities. However, these regulators claim that such intervention is necessary to help the poor.

A wise man once said, "show me a man that wants to be right, and I will show you a man that wants to be understood." Both advocates and critics of payday loan cash advances make compelling arguments for their positions. Both claim to have the interest of the target market for these types of cash advances at heart. But the same line can be drawn right through the heart of the credit card and mortgage lending markets serving the middle and upper income borrowers. Many of these borrowers, with access to easy credit, of virtually unlimited amounts, with much better terms than those afforded to payday loan borrowers, have managed to bury themselves in debt with little prospect of repaying it in their lifetimes.

What it ultimately comes down to is that consumers must take a more active role in educating themselves about the comparative risks and benefits of their borrowing behaviors. It makes little sense simply to narrow the range of options available to consumers for their own protection if they only persist in engaging in behaviors based on acceptance of reward without factoring in concomitant risks. As long as consumers continue to make themselves vulnerable in this way, someone will come along and figure out a means to take advantage of it. Whether it is in the form of specific practices related to cash advances, low interest loans, or some other means yet to be devised.