I would guess that almost every single PDL business is located in a low income neighborhood and that hardly any of their clients are people waiting for insurance reimbursements. If a PDL set up shop in an upscale business, they wouldn't have very many clients would they? The problem is not the legitimacy of their business, but the fact that they exist almost exclusively to prey upon the poor and uneducated. How about robbing illegal aliens and taking their cash, knowing full well they won't report you to the police? Is that "genuis", too? Taking advantage of people to get their money is disgusting, regardless of whether it is legal or not.

i agree with matt. there's a certain line that i think should be drawn when the pursuit of money begins to result in the exploitation of those less fortunate. while you outlined very well a theoretical case in which a person may use the PDL services, that's NEVER going to happen. most people have credit cards, and they're possible to get even with pretty bad credit scores, even if the apr is absurdly high. keep in mind that absurdly high aprs don't even compare to what these PDL sharks charge.

so matt hit it on the head: the only people who'd use PDLs are those who are too poor to even get a credit card, or those who've maxed it out and have no other recourse. they can't become "enlightened" through this experience.

frankly, i think your "why i think PDLs make sense" doesn't make any sense: it's a situation that will never happen in real life, like Saddam's having WMDs. i also noted that you never considered PDLs from a moral point of view: your financial outlook may benefit, but it says a lot about your true nature. i am sorry if i sound annoyed, but sometimes these personal finance blogs seem to forget everything else in the pursuit of bling, which seems to be a sad approach to life.

I work for an Internet advertising business and we do a huge sum of business with a company in Canada who has multiple websites for their PDL business. It's a perfectly legal business and just serves a certain market of people. No one is forcing these people into PDL stores, online or offline. They got themselves into their financial situations and unfortunately don't have the mindset to manage their finances without having to go to a PDL.

Anonymous, you seem to think that it is intelligent, but weak-willed people using these services. That is not the case. PDL stores target the mentally ill, illegals, the homeless, and substance abusers. Even fatboy's best case example involves preying on hurricane victims.

Some cities have taken steps to restrict new PDL stores opening. Why? Because they kill recovering neighborhoods. Everyone knows a PDL store is a sign of an area in decline, and no one wants to open a business next to one. It becomes a self fullfilling prophesy. Property values drop, new businesses are frightened off. Everyone loses.

When I wrote this article I anticipated some opposition from a moral perspective. I do sympathize with people who have to take out payday loans.

However, because there is always a need for high-risk loans that no other financial institutions are willing to provide, the market for these loans will always exist. Suppose the government made PDLs illegal. Who would then provide these loans to the needy? Loan sharks operating in the black market of course. If this is the case, I'd take a regulated PDL over a loan shark any day.

High-risk loans are no different from high-risk insurance / non-standard insurance. If I was a driver with a bad driving history, I would be charged a higher premium for my auto insurance compared to the general public. Are these non-standard insurers exploiting the weak too? In a business sense, this would be called "discriminatory pricing" or "consumer segment pricing". More about pricing here: http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html

Payday loans wouldn't be so objectionable if the result of this "service" wasn't in fact a disservice to customers. PDL companies maximize their profits not by receiving payment in full on schedule for high interest rates, but perpetually rolling over the balance of the loan and assessing bi-weekly interest rate charges and processing fees on those who cannot pay the balance. PDL companies seek not to help customers through financial difficulty, but bind them to their service and keep them forever one paycheck behind their expenses.

Fortunately, there are a growing number of alternatives. Urban credit unions have started rolling out micro-lending programs in recognition of the need of short term financing. For an up front fee and a reasonable interest rate, customers receive a lump sum and typically pay the balance within 30-90 days. Default rates have been very low, indicating this can be a profitable, mutually beneficial service that doesn't have the same sort of exploitative nature as PDLs.

Credit unions foster growth in under-serviced urban and rural areas by providing short term financing, car loans, mortagages, and small business loans, while PDL companies suck out what little economic vitality exists in these underprivileged areas.