The entire payday loan industry in Arizona will be effectively dismantled if a proposition does not pass on Nov. 4.

A licensing program in Arizona allows payday loans until July 2010, and Proposition 200 would extend the businesses’ legality indefinitely if passed.

A payday loan is an advance on a paycheck often repaid when the borrower receives his or her next check.

Supporters say it is necessary to continue allowing payday loans to allow Arizonians additional options for borrowing money in a struggling economy.

But opponents say payday loans, which can charge 400 percent annual interest rates, should be discontinued because they prey on working families and worsen credit problems.

Stan Barnes, the chairman of Yes on 200, said eliminating legal businesses supplying payday loans will not take away the demand for such loans, and therefore will force Arizonans to use other, more financially harmful means of securing loans.

“Customers will be forced to turn to other, more expensive credit options, like bouncing checks, overdrafting, credit cards and unregulated offshore Internet lenders,” he said.

“This will be especially harmful in the difficult economy,” said Barnes, an Arizona state representative and senator from the late 1980s to the mid-1990s.

The claim that payday loans charge 400 percent annual interest can be misleading, Barnes said, because payday loans are not supposed to be paid on an annual basis.

President of Arizona’s Education Association John Wright said Proposition 200 will extend bad lending practices that hurt the working class in Arizona.

“It’s masquerading as reform,” Wright said. “This industry is not good for working families. It takes advantage of them and leaves them high and dry.”

“When people are having a hard time on making a payment on an adjustable rate mortgage, keeping current with their automobile loans and meeting the demands of rising gas prices and increasing grocery prices, this is just a trap waiting for them to fall into,” he said.

Anthony Sanders, a professor of finance and real estate at the W. P. Carey School of Business, said in an e-mail the reason payday loans are so expensive is because borrowers are often serial credit abusers, making payday loans riskier than regular loans.

“If the payday loans were simply used to cover one day … then payday loans are reasonable for that one day,” he said. “But many households use payday loans to fund their previous payday loans, drawing considerable interest charges.”

Sanders, the Bob Herberger Arizona Heritage Chair at the Carey School, said a better solution than banning payday loans in Arizona would be to educate consumers about how to manage their finances.

“Regulating payday lenders ignores the cause of the problem and uses legal Band-Aids as the solution,” he said.

Reach the reporter at matt.culbertson@asu.edu.