by: Editorial Board

PAYDAY LENDING is capitalism at its unloveliest. It’s a business that wouldn’t even exist if the market were providing everyone with enough income to meet their needs — yet 12 million adults, the vast majority of them low-income, resorted to short-term, high-interest loans to cover cash shortages in 2010. According to the Pew Charitable Trusts, a typical borrower takes out eight payday loans a year totaling $3,000, paying about $520 in interest. Not infrequently, borrowers pay off old payday loans with new ones, creating a pyramid of debt that ends in default.

Still, payday loans undeniably meet a market need: They’re far quicker and easier (no credit check or collateral) to get than credit cards or loans from banks or credit unions. And, crucially for many borrowers, taking out a payday loan doesn’t show up on your credit report. Yes, they cost a lot, in percentage terms, but that’s because they’re high-risk; heavy fees and high interest for borrowers who can keep up with the payments compensate lenders for the fact that a significant percentage do not.

In short, how you feel about this business depends on how free you think both borrowers and lenders ought to be to assume very high risks in a situation where the former are more than ordinarily desperate and the latter are seeking — well, let’s just call it above-market rates of return. Is this something consenting adults should be allowed to do, or is it an inherently exploitative transaction?

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