BUSI 620: Discussion Thread
Payday Loans
Exode Jean Jacques
School of Business, MBA, Liberty University,
Spring 2023.
Payday Loans
According to Parrish and King (2009), Payday loans are high-cost, short-term consumer
loans with APRs approaching 500 percent. Yet, “The huge profits accrued by payday lenders are
largely due to the high charges associated with their financial services” (Brookes & Harvey,
2017, p. 168). Thus, borrowers tend to borrow frequently – on average up to nine loans per
year. In other words, a payday loan is a short-term, low-value, unsecured loan that is secured in
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part by a postdated check approved before the borrower's next income. Typically, a creditor of
$700 pays approximately $150 in finance charges.
Therefore, the borrower receives $700 in cash today and will owe $850 on the due date,
which is typically two weeks later. If the borrower does not wish to repay in full, he pays only
the $75 finance charge in two weeks and still owes $700 in principal plus another $75 finance
charge two weeks later. Fusaro & Cirillo (2011) call it a "rollover" or "reborrowing" and is viewed
by critics as the mechanism underlying the "cycle of debt”.
Nevertheless, believers must not make money off lending to the impoverished because
that's not Christian. Collecting interest on overnight loans is not only seen as predatory, but it
also goes contrary to the Religious teaching of care and mercy. In the Scriptures, it is written
that "Thou shalt not give upon interest to thy sibling" (Deuteronomy 23:19, King James Version;
1769/2017). However, believers are obligated to be good caretakers of their money and give to
those in need. As a result, collecting interest on payday loans to those in need only serves to
further disfavor those already suffering monetarily. And because of the high-interest rates
associated with it, many people find themselves in a never-ending spiral of debt as already
mentioned. Such a practice, as it often comes with high-interest rates and limited payback
periods, can lead to debtors taking out additional loans to pay off earlier debts, ultimately
becoming stuck in a spiral of debt. This circle of debt can be very difficult to avoid, particularly
for those with restricted financial means.
In addition to being unscrupulous, collecting interest on overnight loans runs contrary to
the Religious concept of mercy. The Golden Rule, or "do unto others as you would have them do
unto you," is a Religious principle that commands "love your neighbor as yourself (Matthew
7:12). It goes against this concept to charge interest on overnight loans for the poor. Believers
ought to help the poor rather than take advantage of them by making predatory loans.
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References
Brookes, G., & Harvey, K. (2017). Just plain Wrong? A multimodal critical analysis of online
payday loan discourse. Critical Discourse Studies, 14(2), 167-187.
Fusaro, M. A., & Cirillo, P. J. (2011). Do payday loans trap consumers in a cycle of debt?
Available at SSRN 1960776.
Parrish, L., & King, U. (2009). Phantom demand: Short-term due date generates need for repeat
payday loans. Available at SSRN 1532237.
Reply # 1
Congratulations, Brittany,
As I was looking for a meaningful exchange with one of you from the board, I found that
your post consistently provided interesting and insightful commentary while also reflecting the
shared moral ground we all claim to stand upon. For example, "To me, it is obvious that these
debts do more damage than good regardless of the situation. It's terrible that they can make so
much money from people in need”. Honestly, I do agree with you as it is “one of the
determinants of personal bankruptcy” (Skiba & Tobacman, 2019). To do so, they used an
administrative panel data set of loan records in a regression-discontinuity design, and they
estimate that payday loans increase personal bankruptcy rates by a factor of two. Furthermore,
"the CFPB... considers payday loans to be "unfair, misleading, or cruel," and they have stated
that new consumer safeguards in the payday loan market may be imminent if proof necessitates
action." (CFPB, 2013). In a nutshell, it is a disgraced lucrative practice that enriches a group of
people to the detriment of the unfortunate ones.
From a biblical perspective, Proverbs 22:7 warns that "the creditor is the prisoner of the
debtor," which is often cited in Christian-based pleas for individual accountability and better
financial decision-making. Though usually used to advise debtors, this adage serves as a warning
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to lenders not to take advantage of the poor when read in the context, and in light of the rest of
scriptural economic justice.
References
Bureau, C. F. P. (2013). Payday loans and deposit advance product: A white paper on initial
findings. Washington, DC.
Skiba, P. M., & Tobacman, J. (2019). Do payday loans cause bankruptcy? The Journal of Law and
Economics, 62(3), 485-519.
