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Ending online short term lending will hurt consumers

Aug 24, 2013 Sean Albert

Ending online short term lending will hurt consumers

Recent developments in New York state could be detrimental for both short term lending enterprises and local consumers. In a move to further limit the already regulated small dollar lending industry, New York Attorney General Eric Schneiderman recently filed a lawsuit against an online short term company, alleging that it violated state interest rate laws.

The Wall Street Journal reported that Schneiderman brought the suit against an out-of-state enterprise, claiming that its online product offerings exceed the state rate caps currently on the books. However, the company in question operates in a Native American reservation that is supposed to be able to enact its own legislation.

With little legal precedent to support New York's claim, it's unclear if the suit will be successful. However, what it clear is that limiting New York residents' access to short term loan services could harm the state's economy.

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In an open letter published in U.S. News, Lisa McGreevy, CEO of the Online Lenders Alliance (OLA), argued that many Americans heavily rely on short term products to cover their finances. In fact, she indicated that millions of citizens have used small dollar loans to help support their families.

Short term lending is one of the more resilient borrowing sources that borrowers have at their disposal. McGreevy noted that during the Great Recession that resulted from the housing market collapse in 2008, a large portion of consumers were not able to use traditional credit services. Instead, they turned to alternative financial services, including short term loans. As a result, many citizens across the United States were able to cope with the strained economy and support themselves through the difficult period.

In many instances, using the services from an online loan provider can be a much cheaper alternative for consumers than using traditional borrowing products. Also, many online lending agencies have a solid reputation, particularly companies that are members of industry advocacy groups such as the OLA.

In the U.S. News article, McGreevy stated that lawmakers across the country are attempting to control online credit extension and short term lending overall, without providing an alternative solution. Potentially, that could leave a significant amount of already underbanked Americans with very few credit options.

Rather than limiting the industry with severe regulations, lawmakers should create legislation to support the short term lending sector. Simply eradicating the sector in the United States could create a financial vacuum that may harm the national economy.