Cash advances have been the subject of a great deal of controversy in the past, due to the high interest rates that their loans carry – over 200% annualized, and the easy access to credit. Many people claim that payday lending preys on the low income groups and the less educated, causing them to be trapped in a debt cycle. Public interest organizations and many government related bodies have protested over the effect these loans have on the financially inept or the working poor. Many states such as New York and North Carolina have made moves to contain the effects and to enforce lower interest rates. Further, in some states, such as North Carolina, licensed payday lenders have used the charters of banks incorporated in other states to charge higher interest rates than those allowed by the state that they operate in.

However, payday loan lenders maintain that they are providing an important service that is not offered by banks. They are catering to a niche that remains unfilled and that it is a consumer’s right as well as his free choice to take credit when he needs it. In case of an emergency, there may be no other avenue for someone with credit problems and they should not be denied their last resort. These creditors further contend that due to the high rate of defaults on payday loans and fixed operating costs, the loans are not always profitable. Collecting on the loans can be a problem for these companies due to people who deposit falsified checks or even stop payment on their checks. These claims have been verified in a study by the FDIC Center for Financial Research.

Additionally, payday lenders assert that the interest cost is much below the costs related with late fees on bills and credit cards, and bounced checks. Another claim is that they cannot afford to operate on the traditional interest rates in the region of 20 to 25%, since the small amounts of the loan principals mean that interest amounts would be too small to cover even processing charges.