Question

A manager at a "Check Into Cash" business (see Focus on Ethics box on page 192) defends his business practice as simply "charging what the market will bear." "After all," says the manager, "we don't force people to come in the door." How would you respond to this ethical defense of the payday-advance business?

Answer 1

The payday advance business has very high effective interest rates and as per critics takes advantage of the week bargaining position of the customers. This is a short term loan bad by personnel check that the borrower agrees to cover with funds out of the next paycheck that he or she receives. The typical fees for this service is extremely high and has been criticized for its exploitative nature.

However in my view this is not an unfair business model because the advance is given to people who would otherwise not be able to obtain funds from other sources. In most cases they have very low credibility and hence the lender is only covering his risk by charging higher interest rates. Also the lender is drawing funds out of another line of investment and putting them in a high risk venture for which he needs to be compensated. Moreover there are high fixed costs associated with the loan which have to be covered by way of higher interest rates.

Hence the paycheck advance business is Just another business model which has a higher cost to cover for Greater risks involved.