Pres. Obama is busy restructuring the financial systems, and that includes payday lending. The payday lending bill – already signed by some Governors and postponed by others – is basically proposed to protect borrowers from the well-known high interest rates of payday loans.

The payday lending bill is basically intended to restrict payday lending, by limiting payday loans that can be taken by a borrower, while lowering the interest rates and changing the length of the loans.

Although I agree that it is a good move, I doubt that this will make significant impact upon the economy, because the payday lending bill is not attacking the root of the complex problems.

What is the root of the problem?

Of course, this will always be a “chicken first, or egg first” issue – Who’s responsible for people drowning deeper in debts: The lenders or the borrowers?

Payday loans do have a very high annual interest rate of 390 percent – This often drown borrowers into deeper sea of debt – and I agree that, in some ways, payday lenders are often not very informative on terms and conditions (hence the nickname “loan shark” is embedded to the lenders). However, I believe that the borrowers have to share the blame as they are the ones that have to understand about the right loan types to take for the right needs.

Payday loan offers you cash advance, providing you cash that is intended to cover your expenses, technically until your next payday. Will restricting this help the borrowers? That’s the question legislators are yet to answer.

In my opinion, restricting payday loans will stop irresponsible borrowing AND limit borrowers in need to access much needed cash loans. This won’t solve the problem – Even to some people, this will make their life harder to live.

Here’s why – Did you know that the annual figure of 390 percent is equal to a reasonable $15 charge for a $100 loan? Considering the high risk payday lenders have to take to finance borrowers, that rate is actually reasonable (I will get scolded on this :D) For the borrowers, paying $115 for the $100 borrowed to settle some urgent needs they have to met is probably a smart move, depending on their personal finance situation.

Again, know the right loan type you take and the right reason to take it, as knowing that will help you manage your personal finance.

Conclusion – We need better financial education programs!

So, as a conclusion, we are now know that the root of the problem is financial education. This is the problem of the world, not only the US. People are taking cash loans with high mainly because of their pressing need for cash, without proper understanding on the terms and conditions of the loans.

Let’s put it this way. We can’t treat adults like children – We have to give them tools, not playing God by protecting them from harm, limiting their freedom in settling their own personal finance issues. Yes, freedom do requires a lot of responsibilities, but if the they are not fostered, how can they survive, let alone thrive, financial turmoil?

Ivan Widjaya
Financial education is paramount
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