Legal loan sharking or essential service? The great "payday loan" controversy.

• Author: Lynch, Michael W.

FEW THINGS FIRE up professional consumer advocates as quickly as a whisper of "payday lending."

"Payday loans are a transfer of wealth from the poor and the poor-risk to the predatory and the powerful," says Jean Ann Fox, director of consumer protection at the Consumer Federation of America. "America hasn't come very far from the turn-of-the-century 'salary buyers' and 'loan sharks.'"

Indeed we haven't. People have always needed small, short-term loans, and others have always been willing to provide them. Fox is right: Today's thriving industry of payday lending looks a lot like the "salary lenders," later renamed "salary buyers," that thrived in the late 19th and early 20th centuries. "In current dollars, they would buy $650 worth of salary by writing a check for $500," says Lendol Calder, a professor of history at Augustana College and author of the 1999 book Financing the American Dream: A Cultural History of Consumer Credit.

These days, if a person wants to borrow $200 on the first of the month, he'll write a check for $234 dated the 15th When the 15th rolls around, either he pays off the loan in cash or the lender cashes the check. If he can't afford to pay off the entire amount, the lender will roll over the loan for an additional fee.

One hundred years ago, the leading critic of "salary loan lending" called such people "sharks, leeches and remorseless extortioners." Today's consumer advocates call payday lenders "predatory" and "legal loan sharks."

"It is as misinformed and as vicious a fight as you'll ever see," says Thom Branch, senior vice president of the Union Bank of California. Branch entered the fray when he led his employer's effort to partner with Nix Check Cashing, a purveyor of payday loans. "It's been ugly. It's not a new ugly, and it's based on misinformation and paternalism that is misplaced on the best of days."

Branch is on to something when he talks about the Critics' paternalism. "Borrowing money at triple-digit interest rates is never the right solution for people in debt, decrees Consumers Union in a fact sheet on payday loans. The U.S. Public Interest Research Group (U.S. PIRG) and the Consumer Federation of America also know what's best for cash-strapped people. "Consumers in need of short-term cash [should] avoid extremely expensive short term loans, and [should] instead build up a savings nest-egg to cover financial emergencies, seek budgeting and debt management assistance from non-profit consumer credit...