Payday loans, and advances on pay have been around since people paid other people to work for them. The need for small short terms loans has always attracted lenders willing to accomodate. When banks can’t or won’t accomadate a market need, others will step in. Loan sharks ran very profitable, although illegal, businesses. Pawn shops were there to provide temporary loans in exchange for property. Today there are paycheck stores in every poor area of our cities.
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.
Everyone has found themselves in the position of running short on cash. People with good credit fill the shortage by using their credit card. People with no credit or bad credit use payday loans. On the surface this looks like a legitimate service that provides a source of credit to a population that would otherwise be without credit. Why would anyone think that this service is a rip off?
Consumer advocate groups contend that the payday loan industry is charging interest rates that are far in excess to what they need and that they are targeting poor people. Interest rates as high as 700% APR are not uncommon. Each state sets the rules for the industry and consequently the interest rates and other terms vary state to state. So a person with no credit or bad credit is charges 700% where a person with good credit would be charged 14% on their credit card.
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.
Why aren’t banks providing these kind of loans? For starters they are just too small. Banks are also locked into procedures and are regulated regarding their lending policies. Payday loans only require verification of ID, a checking account, and proof of employment. There is no credit check and no inquiry goes on the consumer’s credit report. Loans are typically wired into the applicant’s bank in a single day.
The interest rates are outrageous. However, payday loan customers see the service as a real value. Where else can a person with no credit or bad credit get a loan to pay for an immediate need? Payday loans are simply servicing a financial market that conventional banks and loan companies believe is not profitable, otherwise there would be Bank of Americas next to every bodega in the poor areas of our cities.
Our economy is making payday loans even more popular and this time with a whole new group of people. With the housing meltdown and unemployment near 10%, people who formerly could rely on their credit card to fill the gap now find themselves maxed out or without credit at all. The loan companies realize this and are reaching out to this new market via the internet. Online loans work the same way as the shop loans only they are more convenient to apply for. Needless to say it’s cheaper for the loan companies to do business online than in a brick and mortar store.
If you find yourself in this “new” market catagory 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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