Economic Debate- Payday Loans

For this Economic Debate, we are going to look at individual choices people make, their rationality, and whether or not local (or state) governments should be involved. This debate may have some personal implications in your life, so if this pertains to you, please feel free to share any experience you have with this subject. Payday Loan businesses (pejoratively called loan sharks) allow borrowers with no credit, limited credit, or bad credit to obtain quick cash that larger banks and other financial institutions would not lend to. The tradeoff here is that, typically, these payday loan operators charge higher-than-average interest rates to the tune of 300%-800%.

Advocates of payday loans argue that even though the interest rates may be high, it is up to the individual whether or not they take advantage of the offer, and that high interest rates may be better than the alternative (power gets shut off, no gas for the car to get to and from work or school, money for groceries, etc.).

Opponents of payday loans argue that these companies target the people that need the most protection. Essentially, opponents view these types of lenders as exploitative and see them as taking advantage of people when they need quick funds. Opponents believe that these companies should be regulated and have maximums placed on their interest rates, even though the lenders acknowledge that with a mandated lower interest rate, they will likely not risk lending the funds and the very people who need the money will be without it.

I’ve attached a few resources to give you deeper insight to the debate on payday loans. Some of the material is heavily in favor, some is heavily opposed, and some argue a slightly different approach. Also, you are not bound to the resource I have provided. If you do your own research, that is fine as long as you are using reputable sources.

Using your understanding of economics, answer the question:

Do you think payday loan businesses should be allowed to operate? If you were the deciding vote in your city council to allow or ban these services in your city, how would you vote and why?

Remember, if we are thinking like economists, the word “greed” should not factor into our discussion. “Self-Interest” exists, which means that we expect each person to make the most rational decision that will benefit them.

So, given this discussion and the attached material, in 175 words or more, tell which approach you would implement if you were the sole decision maker. Be sure to include the BEST arguments from both sides in your discussion, but ultimately, you should choose one side. (You may offer a third solution if interested, but it should be very clear where you stand on the issue).