Payday Loans-Rip Off Or Godsend

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.

Payday loans are designed to help out a person who finds themself temporarily short of funds. They are not designed for long term financial committments like auto loans. Typically a payday loan will be less than $1500 and more likely be in the $200 to $300 range. They are short term loans, usually lasting the time between paychecks or 7 to 14 days.

When people with good credit find themselves in a cash crunch before payday, they will use their credit card to cover the shortfall. However, people with no credit or bad credit have little choice in how to come up with cash on short notice. Payday loans provide the financial backup that credit cards do for people with good credit. So if the loans are providing a value to people who would otherwise have no access to credit, why do so many people think they are a rip off?

The answer of course is the interest rates charged. Depending on state regulations, the interest on a 7 day loan can be as high as 500% when annualized. A $100 seven day loan can cost the borrower $21 in interest. Consumer advocate groups call these rates outrageous and contend that the payday loans are predatory and target the poor.

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.

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.

Payday loans have found a new market thanks to the high unemployment and housing disater. Persons formerly holding “good credit” ratings are now finding themselves with bad credit ratings and being locked out of conventional credit access. The loan companies have all jumped on the internet where this “new” market lives. Online loans are identical to the shop loans but are much more convenient.

As a one time deal to get over a temporary shortfall in cash, the payday loan can be useful if it is paid back in full at the end of the term. Where people get into trouble is they only pay the interest and stretch out the term of the loan. That interest can quickly become more than the loan amount itself. If you are considering such a loan, be sure you fully understand the terms and conditions.