The success of the payday loan industry has been met with backlash from politicians, consumer groups and many journalists, who accuse the industry of exploiting vulnerable individuals and targeting certain populations to obtain their wealth. As a result, regulation of payday loans has grown almost as fast as the industry itself.

The industry is responding to its critics by providing needed services to people who are underserved by banks and credit unions, giving them access to credit they might not otherwise have to get them through periods of financial difficulty. Who is right? A closer look reveals that many of the criticisms of the payday loan industry are based on myths:

• Payday loan myth #1: Fees are too high. However, it simply doesn't make sense to schedule payday loans for an entire year when they are due in two weeks. Additionally, short-term alternatives to payday loans—such as overdrafts, bounced checks, late credit card payments, and service reconnection fees—often prove to be even more costly.

• Payday Loan Myth #2: The Debt Trap. Critics say payday loan companies trap their customers in a cycle of debt. This runs counter to empirical evidence, however, which suggests that payday loan bans lead to worse outcomes for consumers—in the form of more bounced checks, increased bankruptcy rates, and so on. Finally, debt cycle theory seems to get the causality of payday lending behavior back: people use payday loan services because they face financial distress, not the other way around.

• Payday loan myth #3: Lenders target the poor and minorities. The evidence suggests that while payday lenders are more likely to be in markets with relatively low household incomes, they are not more likely (after controlling for income) in markets with a disproportionately minority population. As lenders target their services to low-income earners, this may be: (a) an attempt to tap into an underserved market; and (b) reflecting the fact that payday customers tend to be those in financial distress. In other words, there is a greater need and natural customer base for payday lending in relatively low-income areas.

• Payday Loan Myth #4: Most consumers want more protection from payday lenders. Survey data indicates that a significant majority of payday loan customers are satisfied with the service they receive. Meanwhile, state regulators report very few complaints about payday lenders.

In addition, evidence shows that payday lending offers many benefits to consumers:

• Greater consumer welfare. Payday loans allow consumers to better withstand short-term financial difficulties, avoid bankruptcy and bounce fewer checks.

• Better access to credit. Payday loans offer access to credit to those who may not be able to get it from other sources, such as banks, credit unions or credit cards.

• Transparency. Payday loan terms and conditions are prominently displayed in stores for all to see, so customers don't have to sift through hundreds of pages of legal text in bank/checking account terms and conditions to find out how much the fees will be and when and how they will be assessed.

• Costs. Payday loans often offer cheaper rates and better terms than alternatives such as overdraft/bounced check fees, credit card late fees, late/reconnection fees, pawn shops, auto loan providers and rental businesses.

• Better than alternatives. Payday loans may be preferable for other reasons, such as allowing borrowers to avoid medical appointments, utility shutdowns, resorting to dangerous usury, or enduring the embarrassment and potential conflicts of borrowing from friends or relatives.

Conclusion

Consumers have finally made their verdict: they believe they benefit from the option of payday loans. So instead of restricting or eliminating payday loan markets through regulation, policymakers should seek to open them up to competition by lifting payday bans and regulations. The goal should be to maximize choice for consumers and minimize the costs of short-term credit transactions. This will benefit economic growth in general and short-term borrowers in particular.