Two Sides of Pay Day Loans

The passage of the Credit Card Accountability Responsibility Disclosure (CARD) Act has again put into focus the controversial practice of payday loans . Proponents of the practice say that pay day loans are the only way for some low income borrowers to be able to make it through cash crunch periods. Opponents say that pay day loans prey on the poor with predatory lending practices, pointing out that annual percentage rates can go as high as 500%.These are NOT cheap pay day loans.

With the CARD Act making it more difficult for marginal borrowers to qualify for traditional credit cards, many of these same borrowers will have no choice but to apply for payday loans in times of cash shortfall.

Consumer advocate Tom Lehman said this of pay day loans, "payday lending services extend small amounts of collateralized credit to high risk borrowers, and provided loans to poor households when other financial institutions will not. Throughout the past decade, this 'democratization of credit' has made small loans available to mass sectors of the population and particularly the poor that would not have had access to credit of any kind in the past."

Lehman says he is a consumer advocate though he's been criticized for taking money from payday lenders. In his recent Fox News special, John Stossel also touched on the issue of payday lending , ‘The politicians say they do it to help low-income people. But again, their "help" harms. The lenders' former customers complain that the payday lenders were their only way to avoid missing a bill payment -- and maybe having the lights shut off.
‘It's not just a matter sometimes of saving money," one borrower told us. "It's a matter of saving yourself grief.’”
Terri Verrette, a former payday lender, is now a financial counselor at America's Family, a Colorado Springs nonprofit group that helps poor people become more self-sufficient, criticized pay day loans this way, "The most fascinating thing you see is someone who doesn't realize how much interest he's paying,"