Wednesday, February 5, 2014

Payday Loans - Rip Off Or Godsend?

Payday loans have been around ever since there were people with money to loan and people who wanted to borrow money.  Sometimes they were called loan sharks, sometimes pawn brokers and today they are called payday loan stores.

Paycheck loans are unsecured, short term, and typically are not greater than $1500 and usually much less.  The payday loan is designed to tide a person over when their money runs out before their paycheck arrives.  Consequently these loans are for 7 to 14 days.

If an unexpected bill hits before payday, people with good credit simply put it on their credit card.  If you don't have credit, or you have bad credit, and you don't have the cash, how is that bill paid?  If it wasn't for payday loans, that bill wouldn't be paid.  If the loans are providing a valuable service, why then do some people call them a rip off?

When a person is charged over 500% APR for a loan, many people will call it a rip off.  Consumer advocates say the rates charged are usurious and unsupported.  The industry says it needs the rates to cover the 25% default rate and the cost of running businesses in depressed areas.  As a practical matter, a payday loan can cost $30 for every $100 borrowed.  Couple this high rate with the fact that most of the payday loan locations are in poor neighborhoods, and it would appear that they are predatory lenders.

How do payday loan companies get away with such high interest rates?  Who would agree to those kinds of terms?  83% of the payday shops are located within 1/4 mile of distressed communities.  Compare that to 51% of credit unions and only 34% of banks.  Payday loans can charge that kind of interest because nobody else is serving that community.

The poor in this country are sometimes referred to as the unbanked.  That is to say the banking industry does little to provide them with the same services as they do wealthier consumers.

Conventional banks are not competing for this lucrative lending market, yet.  The loan amounts are too small and the turn around is too short.  Also payday loan companies have made applying and approval exceptionally easy compared to a bank application and approval process.  With a payday loan the applicant simply has to verify his ID, have a checking account, and have proof of employment.  Applications are usually approved same day and the funds are wired to the applicant's bank the next day.

Payday loan customers don't see the loans as a rip off.  Firstly, where else can a person with bad credit get a loan to cover emergency needs?  Secondly, payday loan customers don't view the loans as an everyday resource but one that they will only use rarely.  It's like buying a $4 cup of coffee in an airport knowing you can get it for $1.50 at McDonalds but you're trapped in the airport.  You want the coffee so you buy it.  Paying $60 two weeks from now in order to get $200 today so you can pay the utility bill is just the cost of doing business.

With unemployment nearly at 10%, payday loans are now tapping into a new market via the internet.  Scores of payday loan companies are now reaching the formerly good credit customers who now find that there credit has taken a dive and are unable to obtain conventional lending.  Online loans work the same way as the shop loans and are fast, convenient and offer the financial support that is not available otherwise.

If you find yourself in this "new" market category and you are considering using a payday loan make sure you do your research.  Interest rates between companies will probably not be different because they will charge the most allowed by your state law.  The place to look for differences is in service fees and features.  Read the terms and conditions carefully and fully understand the consequences of not paying the loan back on time.  Make sure you can afford the loan.

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