Payday loans are high-interest loans that are easy to obtain and are secured by verification of employment or other type of collateral. There are no credit checks and the application process is relatively simple. Any one can apply for these loans, but most of the borrowers are from low-income backgrounds.
The concept of loans is that the customers borrow the loan until their payday, which is generally 14 to 30 days. If at the end of that term the customer cannot repay, he can take out another loan to close out the first one. He may also roll the loan over with additional fees and interest.
The payday loan industry banks on the borrower’s psychology of thought when using its services. People who need money for essentials think in terms of getting those immediate financial needs resolved quickly. The rent is due or the baby needs formula. What’s important is the financial need at the moment. The ramifications of the loan can wait. Then there are greater issues reflecting what causes the need for payday loans in the first place. Those answers are poverty, underemployment, and in some cases, financial irresponsibility.
The merits of payday loans depend on who you ask. On the one hand, “payday” in reference to these loans has become synonymous with “predatory.” Lenders have also been referred to as “sharks.” They are accused of targeting indigent communities who will have difficulty repaying and will, therefore, be penalized with exorbitant fees that will quickly escalate the amount due. Because these loans have had an adverse financial hardship on thousands of low-income citizens, some states have banned them companies altogether.
The other side of the argument is that these lenders are providing a much-needed product to people who cannot qualify for conventional loans. Low-income and bad credit history are two factors that impede indigent residents from getting help from banks. Without the services payday lenders provide, financially vulnerable citizens may not be able to get help anywhere else.
Lenders contend that the risk of lending to their customer base is much higher than average. They justify the abnormally high interest rate with the irregularly high percentage of defaulted loans. Some borrowers do so irresponsibly which is not the fault of the lender.
Despite the negative publicity these payday loan companies conjure up, thousands of people borrow from them. If they shut their doors today, the financial need would still be there and many would-be borrowers would have no where to turn for financial help. So then these lenders–like it are not–are filling a void in the consumer loan industry.
Going forward, there is room for discussion on how these lenders can better serve their customers. One of the suggestions is to give customers a lower interest rate, and reduce or remove the fees for extensions and missed payments. As long as these companies exist, people will line up to apply.