Q: Does Payday Lending exploit financial hardship for profit?

Critics say yes, claiming that lenders target the young and the poor, particularly those near military bases and in low-income communities. They also say borrowers don't realize that high-rate loans are likely to trap them in debt, as they must renew loans to pay off both principal and the high fees charged by lenders. Critics point to the triple-digit interest rates incurred by payday loan recipients, as opposed to "regular borrowers" who pay at most 25% or so on their credit cards.

Supporters argue that payday loans actually bail out many borrowers, who cannot turn to "traditional" sources of lending due to their poor credit standings. They also counter that many companies require minimum monthly incomes that place them above targeting the poor. Besides, they say, a bank overdraft fee (typically $25) actually exceeds the $15-$30 charged for every hundred dollars borrowed from most lenders.

Q: Do Payday Lenders use overly aggressive collection practices?

Payday lenders are entitled to employ the same industry standard collection practices used to collect other debts. One note: since the borrower uses a post-dated check as "collateral," the lender CANNOT legally threaten him with criminal prosecution for check fraud in the event that check bounces.

Q: Are Payday Loans unfairly price-structured?

Proponents of payday loans say no, pointing to the fact that while their APRs may seem sky-high, they're calculated on a yearly basis: in fact, the shorter terms of repayment tell a different story. For example, a 20% APR on a one-week $100 loan would create only 38 cents of interest. Besides, they say, processing costs for payday loans are roughly the same as for mortgages or other loans.

Opponents disagree, and say payday loaners are just singing the blues, as their processing costs don't match those of traditional lenders who must run credit checks and incur other costs from determining a borrower's creditworthiness. The payday lender only has to look at pay stubs.

Q: Is the profitability of making Payday Loans all it's cracked up to be?

Not always, says the FDIC Center for Financial Research, which found that “operating costs lie in the range of advance fees” and that considering default losses and fixed costs, payday loans may "not necessarily yield extraordinary profits." Payday loaners may also face losses from fraudulent checks or stop-payment orders.

Not so fast, say critics: if loan defaults were so hazardous to the lender, why is the industry so booming? Others, such as consumer advocates, dismiss payday loans outright, claiming they hurt those most pressed to pay their debts in the first place.

Q: What are Payday Lenders' greatest justifications for the services they provide?

Proponents of payday lending point out they provide a service nobody else does -- as well as highlight others who have tried, and failed. For example, some credit unions have attempted to provide such services, but found they couldn't do so without government subsidies. Often they found the high default rates of borrowers too much to deal with.

But their trump card may be a Federal Reserve report that decided that payday loans shouldn't be called "predatory" since they may improve the welfare of the households doing the borrowing. It even suggests that not all legislation may be good for the industry. "Defining and Detecting Predatory Lending" concludes that "if payday lenders raise household welfare by relaxing credit constraints, anti-predatory legislation may lower it."

Additionally, payday lenders point not to their own interest rates, but rather to the overdraft, late payment, and penalty fees that will be incurred if the customer is unable to secure any credit whatsoever.

For example, looking at the APR costs for two-week loan terms:

$100 payday advance with $15 fee = 391% APR;
$100 bounced check with $48 NSF/merchant fees = 1,251% APR;
$100 credit card balance with $26 late fee = 678% APR;
$100 utility bill with $50 late/reconnect fees = 1,304% APR.

SO WHAT IF YOU NEED CASH, BUT DON'T WANT TO TAKE OUT A PAYDAY LOAN?

In the midst of all the controversy gets lost one fact: there are alternatives to taking out payday loans. Even if you do have bad credit, options such as pawn shops, credit union loans, bank overdraft protection and credit-card advances are available (though at a higher interest rate). You can also go to your employer and ask for a paycheck advance, though most companies have limits on the number of time you can request one. If all else fails, there are emergency assistance plans in many communities, and, of course, loans from family and friends.

TALK TO YOUR BANK DIRECTLY: A few brand-name banks offer their own "payday advance" for customers with direct deposit; ask if your bank offers such services. The borrower receives a cash credit available for immediate withdrawal, paid back (usually with a 10 percent fee) upon receipt of the next paycheck. To make things better for the borrower, one bank even waived its fee after regulators began to look at the practice.

Also, use your collateral. For example, car owners can secure a loan based on their clear ownership of the vehicle. Likewise, income-tax preparation firms will "advance" you money based on your coming tax refund. With a little creative thinking, prospective borrowers can find all kinds of solutions to their cash-flow problems.