Are Payday Loan Companies Really Predatory Lenders?

Posted by on Nov 2, 2006 in Articles

Are Payday Loan Companies Really Predatory Lenders?

Many politicians, reporters and military leaders refer to payday loan companies as “predatory” lenders.

Is this an accurate description or do we need a better term?

By definition, a predator is an animal that hunts and kills other animals for food through predation. For predators, killing the prey is a necessary prerequisite for consuming it.

Mortgage and car title lenders who seek to seize assets such as homes and cars are, indeed, predatory lenders:

Strictly speaking, the term predatory lending refers to secured loans (by home, car or other property) which are offered by the lender knowing full well that the borrower will be unable to repay the loan. This allows the lender to seize property used as security and sell it on the open market for a profit.

Once they have seized the desired asset from their victim, there is nothing left for them to consume. The victim is dead as far as they are concerned and the predator must seek out new prey.

Payday loan and credit card companies, on the other hand, do not want to consume their victims (i.e. drive them into bankruptcy). They would rather keep collecting interest while:

  • increasing the principle (it is why CC companies reduced the minimum monthly payment from 5% to 2% – gives people the ability to service a larger debt), or;
  • keeping the principle the same (it is why unethical payday lenders do not accept partial payment – they would rather you keep extending the loan by paying interest on the full amount ad infinitum).

So for credit card issuers and payday lenders, it is in their best interests to keep you very much alive while they feed on you.

In other words, the term “predatory” cannot, and does not, apply to payday lenders.

A more accurate term for credit card companies and payday lenders who do not accept partial payment would be parasitic lenders because, ideally, parasites feed off of their host without killing them. It is not desirable for parasites to kill their hosts.

For borrowers who use payday loans responsibly (borrow only what they can afford and repay the loan in full on their next paycheck), it is a symbiotic relationship (where both parties gain mutual benefit from each other).

Prolonged relationships (loans extended or taken out repeatedly), on the other hand, will always benefit the lender at the borrower’s expense.

If we make a distinction between “predatory lenders” (mortgage lenders and car title loan shops) and “parasitic lenders” (credit card issuers and payday loan companies that don’t accept partial payment), newcomers to the discussion would probably have a better idea of the differences between these two different (but equally dangerous if abused) types of financial animal.

Inaccurately referring to payday lenders as predatory or loan sharks is demagogy. It serves little purpose other than to forward a political agenda and it clouds the water. It prevents constructive dialogue on the topic of short-term, consumer loans for people with little or no credit.

Remember: payday loans are an expensive form of credit. If possible, please consider cheaper payday loan alternatives. If a payday loan is your only option, compare lenders carefully and only use ethical, state-licensed lenders.

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