Julian-David M. Smith
Gov 2306
31004
10/4/14
Payday Loans
One of the biggest problems in Texas is also one of the least talked about. The problem is payday loans and how they are getting out of control. The business behind payday loans is sketchy in itself. In some instances if a person takes out a loan they have to pay back they might have to pay up to 500% in interest from what they took out. This forces the person who took out the loan to sell some of their belongings just to pay back their debt. Some payday loan companies even allow people to get another loan to pay back the one that they currently have. This throws people into a cycle of debt which is extremely difficult to escape. Even though people are thrown back into it isn’t entirely the companies fault since people don’t have to take out payday loans. The reason that people do takeout payday loans is because the people who take out payday loans have either the choice of bank overdraft fees, criminal loan sharks or pawning their possessions.(Texas New Payday regulations pg.4). The main problem with payday loans is that it is a very loosely regulated market. The payday loan industry tries to avoid regulations instead of submitting to them. (Texas New Payday regulations 6). Because it has become a loosely regulated industry, the payday loan companies can continue to prey on people who are in deep economic situations and get away with it.
The people most affected by payday loans are the ones who take them and their families. There are three types of people who borrow payday loans. Those who borrow the optimal amount, people who borrow too much, and people who borrow too little. (Texas New Payday regulations pg.5). The people who borrow too much are the ones most affected because they become trapped in an ever increasing cycle of debt and loans. They keep taking out loans in order to pay back their old ones and even end up pawning their old possessions. The people who borrow too little end up with a sense that they will never fall into debt and may make them end up becoming people who borrow too much.
The solution to the payday loan problem would be to actually regulate the industry. One of the most important parts of the industry that needs to be regulated is the rate cap. The rate cap is the maximum percent that the interest rate can go over. In the 2010 finance reform bill that was passed, lacked any rate cap on payday loans. (Payday Lending: A Thin Line between Love and Hate pg. 20). This allows the payday loan companies to be extremely predatory against its customers. They can charge them an insane amount of money for thee consumers interest rate and have complete legal protection over the loan. The solution to this problem would be to have an interest rate cap on all payday loans. A cap of no more than 200% would be more than reasonable for both parties. The lenders can make a profit and the people taking out loans will not have to pay back an insanely large amount as they did before. Another way to solve this problem is too educate the people who take out the loans. Many of the people who take out payday loans don’t understand how much they actually have to pay and don’t understand how loans work. This makes it easier for companies to have customers. This is fault on the consumer side because it should be their responsibility to know what they are getting in too. In their defense the payday loan industries know their customers do this and try to profit off of this. Some companies try to keep the details of the loans obscure and hand out contracts to customers in envelopes to discourage them from reading it. (Texas New Payday regulations pg.6). To avoid this payday loan companies should be forced to show the full amount of a loan upfront instead of behind long contracts. This makes sure that the people buying loans know exactly what they are getting into. For the people taking out loans, they should try to educate themselves more in how loans work and how much