The Texas Legislature has passed news laws, effective as of the beginning of this year, which will attempt to bring more oversight and transparency to the payday loan business. In part, the laws require that payday lenders receive a state-issued license. More importantly for borrowers, the laws also mandate that lenders reveal costs and fees, provide a comparison to other loans, and make clear what interest may be charged on the loan.

The laws come in response to criticism of the payday lending industry in Texas, accusing businesses of predatory lending and taking advantage of people with bad credit. Lenders are apparently turning a decent profit, since a host of new competitors has entered the industry in recent years. The number of payday lenders in Texas nearly tripled from 2006 to 2010.

Those who seek out the services of a payday lender often need cash immediately and are unable to secure a loan from a bank or other institution that could provide a lower interest rate. And while the laws of economics dictate that those with bad credit must endure higher interest rates because they are at a greater risk of default, critics suggest that the rates charged by payday lenders are outrageous and unreasonable.

Borrowers should always be aware of the terms and conditions attached to any loan document they sign. Before entering into a loan agreement, a borrower should have some foundation of financial literacy, including an understanding of how interest factors into their loan. Lenders are in the business of making money, and borrowers should learn to protect themselves from risky loans. In addition, those with bad credit can undergo credit counseling to help improve their finances and secure more favorable loan terms in the future.

Source: The Texas Tribune, "Texas Payday Lenders Face New Rules, Scrutiny," Thanh Tan, Jan. 5, 2012.