A few weeks ago I was contacted by a manager from National Payday, a short-term loan company, inquiring about advertising on my blog. Since I had never considered placing any advertising on my blog, I declined her request, but I asked if there could be open dialogue about this payday loan industry. I told her that if there was good discussion, the dialogue itself could make up a blog post.

So for the past few weeks, we’ve exchanged e-mails, and she has responded to some of the deeper questions I’ve had about this industry. Instead of making a sweeping statement that all these types of businesses are predatory, I thought it would be fair to give a voice to someone who actually works in this industry.

Here are two questions I asked:

- The biggest problem I have with this industry is the issue of financial carelessness on the part of the borrower. No matter what income level we are at, we can all learn basic finance management skills. I understand that a single mother desperately trying to make ends meet, or pay for utilities is going to need a little financial help. But for others that come into payday lenders, it is to finance a reckless living style, or a standard of living that cannot be maintained. I don’t want to necessarily make generalizations, but I’m assuming that a lot of people that come in would receive greater benefit from being taught responsible financial skills over borrowing $400 they need for the next two weeks. It is sort of the like the analogy of teaching a man to fish versus giving him a fish to eat. What is this industry doing to help people get out of a vicious cycle of debt?

- You say that your company offer loans to people who may not qualify for traditional loans. Well sometimes they don’t qualify for traditional loans because they have bad credit or no employment. What principles or guidelines does your company use to discern who can qualify for a loan. I guess what I’m trying to get at is this: does your company share in the responsibility to help protect borrowers from things like bankruptcy?

And here is the response I received:

Educating The Public On Payday Lending

Payday lenders online offer a valuable service to many people experiencing emergencies who may be blocked from obtaining credit due to poor credit histories. Without ready cash, or easy credit, medical conditions go untreated and late fees pile up. However, there are some people that suggest that payday loans are too easy and that too many people will be attracted to the high-interest loans not due to emergency situations, but because of a carefree and risky attitude about borrowing. Are there any guidelines that the payday lending industry uses to avoid catering to people who may be courting a tornado of mounting debt and bankruptcy?

Commitment To Customer Service

The payday lending industry does try to educate its consumers. Unlike many companies that do not even have a customer service branch that isn’t an automated phone system by now, lenders like National Payday offer direct communication with customer service representatives who can help to educate clients on the pros and cons of payday lending. While they can’t keep people from borrowing above what they can manage, they can make the terms of the contract very clear so that there are no surprises down the road they were not aware of to begin with.

Limits On Lending

An initial cash advance is typically limited to $300 or less. The customer is offered a free payday loan if they pay back the loan on time, stressing the benefits of paying it back within the appropriate time frame. By limiting the amount withdrawn initially, the lender makes it easier for the customer to understand through a dry run how the system works for them.

Full Disclosure of Interest Rates

Payday lenders do not hide the fact that rates of interest on these loans are high. However, when compared to late fees, they can save money if used appropriately. It’s even been noticed that people are using payday loans to build their credit back up after a bankruptcy takes place. By having a lender willing to lend to people who have hit hard times, they get the chance to re-enter the system eventually with good credit. The cost of this is that with riskier lending comes higher interest rates. This is a deal that many consumers are willing to make for the chance to rebuild a good credit history.

While no agency can prevent someone from borrowing beyond their means, consumer education can go a long way towards discouraging poor borrowers from applying for a loan that is not right for them. The payday lending industry continues to be committed to educating their clients with good customer service, limits on lending, and full disclosure of interest rates and penalties.

I appreciated the dialogue I’ve had. It is true that these short-term loan companies thrive because of the high interest they charge. But the same thing can be said about credit card companies. There will continue to be discussion about how much interest is too excessive, and what restrictions are necessary on these companies. I’ll let the politicians figure that out. What consumers need the most is education and awareness about the risks that are involved. Proper due diligence is required if you are ever going to do business with a pay day loan company. Know what you are getting yourself into.