The payday loan business has grown throughout the United States during the last five years. Largely unknown until recently and enhanced by deregulation of banking laws, these businesses have turned up throughout the country at an alarming rate. Also called cash advance loans, these businesses concentrate on short-term, unsecured loans of a couple of hundred dollars at a time.

A common scenario has a customer borrowing a few hundred dollars for a period of two weeks, generally when a financial crisis finds them in need of emergency cash. They write a postdated check for the loan amount, plus a fee that generally runs between $15-20 per hundred dollars borrowed. The loan company gives them the cash and at the end of two weeks, cashes the check. If the consumer can’t repay in fourteen days, the loan can be renewed by having the customer pay an additional fee. Most states have laws regarding the maximum amount that can be borrowed and the number of times the loan can be renewed, but even so, the rates of interest charged on such loans, when annualized, average 400-600% per year.

Lenders have gotten around a few restrictions by serving only as intermediaries for out of state banks, thus circumventing in-state limitations on a maximum interest rate. Now several states, which are discovering themselves plagued by payday loan stores, are contemplating additional legislation to help fix the problem.

Among the items proposed to reduce the impact of such stores would be to restrict the number of stores in a given neighborhood or to mandate a minimum distance that must be maintained between stores. That might seem, on first glance, to be a good idea. After all, if the neighborhood isn’t full of these places, then the problem goes away, right? Well, not exactly. Those who dislike these lenders appropriately claim that the fees they charge are outrageous. And they are. But what brings down high prices in the market? Competition! The more businesses that compete for a customer’s dollar, the more likely they are to lower their fees in order to attract more customers. And yet these states are proposing to limit competition in order to lower the prices!

That isn’t likely to work. People go to these businesses because they have a need for the products offered, including a need for quick cash loans. If they need them, they will find them. The fewer the number of locations, the more the businesses can charge. The suggested solution will probably make payday loans more expensive than ever, and that advantages no one.

There may be other answers to this problem, but the solution of decreasing the number of stores or keeping them a certain distance apart actually protects these lenders, rather than hurting them. It’s time to think of a more favorable idea.