Cash Flow, Credit Cards and Pay Day Loans

Cash flow is often the difference between solvency and bankruptcy for many businesses... especially small ones. You can have a great product, excited customers and even fantastic sales - but if the cash is leaving faster than it's coming in, most businesses either pack-up or go to a commercial bank for a line of credit. This line of credit allows them (for a cost) to smooth-out the differences between expenses and cash income. Very few businesses could survive without this assistance.

When we look at the smallest of businesses, the household, this same cash flow issue arises more often than most of us would prefer. For higher-income folks like me, we can simply use credit cards and cash savings. For those on the lower end of the income spectrum, however, credit cards and big savings accounts are a non-starters. What's left? Pay-day loans! Hooray! Yes... yes... I know... these high interest loans are one of the favorite punching-bags 'consumer-protection' advocates and journalists. I would argue, however, these negative feelings are misplaced.

Pay-day loans, much like credit cards, HELOCs and alcohol, are best used in moderation. Most critics point to two separate issues: 1) the high interest rates and 2) some borrowers who take multiple loans from multiple lenders and enter into a debt death-spiral. As for the interest rates, they are driven by the high risk nature of the loans. Having had several sub-prime Prosper.com loans default, I can personally testify to the likelihood of loss. Note to all my lefty readers: if you don't like the interest rate, I suggest you loan some money to folks living paycheck-to-paycheck and let me know how it turns out.

The second concern, the debt death spiral, is more of a comment on the poor level of financial education in the US than on the pay day loan folks. There are a whole host of personally destructive activities that negatively impact both the rich and the poor. A dynamic and free society carries with it both the freedom to succeed and the freedom to fail.