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The Pros And Cons Of Payday Loans

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Are payday loans really that bad? This article goes in depth about how payday loans work and what it is, the opinions of both sides of the argument about payday loans, and the high interest rates that payday loan lenders charge. Payday loans are called such because the day borrowers receive their paycheck is when they can pay back the loan. Payday loans are small, short-term loans that can assist with any emergency payment such as a car accident, weather damage to a person’s house or unexpected hospitalization. The borrower must have a job and a bank account to borrow from a payday lender. The interest rate seems very high annually, as high as 400%. The reason for the high interest rate is because the loans are short term, so they normally …show more content…

The Consumer Financial Protection Bureau states that 75% of the industry’s fees come from borrowers who take out more than 10 loans a year. The Center for Responsible Lending is a nonprofit, non-partisan organization that focuses on fighting predatory lending practices. The director of state policy Diane Standaert argues that payday loans are not how the industry advertises them to be, and that borrowers have no choice but to roll over their loans many times, which rises the interest fees, trapping the low-income borrowers in an endless loop. The Center for Responsible Lending offers a yearly interest percent cap at 36%, claiming it to be reasonable standard for borrowers to pay back. However, Jamie Fulmer, the spokesperson for Advance America, one of the United State’s biggest payday lenders, argues that the proposed price cap is not reasonable at all, since they cannot make a reasonable profit from that, and explains further that the payday-loan interest …show more content…

A study that Jonathan Zinman performed in Oregon shows what happened when the annual interest rate was capped from 400% to 150%. Most, if not all payday loan shops left the state. After the shops left, it seems borrowers were worse off than before, not having access to payday loans. Zinman wrote another study, co-authored by Scott Carrell, about U.S. military personnel using payday loans. According to the previous senator Elizabeth Dole, during a 2006 senate bank committee hearing on payday loans, presented a map with several payday-loan shops set up around military bases. The data Zinman and Carrell gathered concerned job performance and military readiness from several Air Force bases showed that payday loan shops were affecting U.S. Air Force soldiers, causing a decline in both job performance and readiness, causing soldiers to fail their performance evaluations. Since this was big issue, Congress passed the Military Lending Act, which capped the interest rate payday lenders can charge active personnel and dependents at 36%, which effectively caused many shops to move their businesses away from military bases. However, academic research has even been proven to be biased in different ways depending on funding from industry advocates on different sides of the argument, as an attempt to push their objective forward. The article mentions that each academic paper

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The book Freakonomics by Steven D. Levitt and Stephen J. Dubner talks about many different things, including cheating teachers and sumo wrestlers, how abortion lowered crime rates, how a street crack gang works, and whether the way parents raise their children even matter. These topics seem to have nothing in common, but all of these topics were identified in the same way: an economist (Levitt) looked at school test scores, crime data, and all sorts of other information, looking at them in unconventional ways. Because of that, he has come to many interesting and unique conclusions that make complete sense. These findings were based on some simple ideas: the power of incentives, conventional wisdom is not always right, things may not have obvious causes, and experts often serve their own interests instead of the interests of others. Perhaps the most important idea in the book is, as Levitt and Dubner state, “Knowing what to measure and how to measure it makes a complicated world much less so” (14).

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