Payday Lending, Part III: Will loan caps bring the return of the neighborhood loan shark?

Some time ago, a woman wrote a letter to The New York Times, explaining how her life had been pretty much ruined by a loan shark.

She had borrowed $50 when her daughter was sick and had to pay three consecutive monthly payments of $22. It began a cycle where she wound up broke and then foolishly went to another loan shark. She eventually lost her job (the loan shark went to her boss when she couldn't make a payment), and finally began working at a new place of employment for a very small salary and naturally couldn't pay the loan sharks she owed money to. She ended her letter by noting that "the blood-suckers are hounding me to death."

She signed her letter, "Helpless."

The year was 1908. One hundred years ago.

Today, that same letter could easily be written, only with the words "payday lending store" in place of "loan shark." That said, a payday lending company may telephone a home relentlessly, trying to get their money back and then some. They may sue a person in court. They may help make life miserable for some people, decimate their credit score, send them into bankruptcy and financially ruin them for years to come, but at least they can't legally send someone to appear in your doorway and threaten your health, or stalk your boss.

Borrowing money with interest rates you can't afford is still a poor idea -- pun intended -- but at least predatory lending offers a safer option out there than loan sharks.

Payday lending stores started to swell in the early 1980s when many banks, angling for better profits, moved out of poorer neighborhoods. That's when the industry truly started to come into its own. It also didn't help when, in 1979, laws were loosened governing interest rates on loans. Before 1979, every state loan capped how high an interest rate could go.

Arguably, the predatory loan industry can evolve even more beyond not breaking people's legs -- much, much more. On the other hand, with 13 states having banned or virtually eliminated the payday loan practice, and many others looking like it may, one has to wonder if this path is just going to take us back where we started. Sure, plenty of people abuse the system, but I half wonder if this will just encourage anxious, occasionally-cash-strapped citizens who feel helpless to someday do something they never dreamed of doing -- like meeting a loan shark in a dark alley.

Geoff Williams is a business journalist and the author of C.C. Pyle's Amazing Foot Race: The True Story of the 1928 Coast-to-Coast Run Across America (Rodale).

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