Payday Loans

A short Term Solution For Immediate Cash

People have been taking out what we call payday loans since time began.  Many times it was called an advance that you would get from an employer.  On the seedy side it may have been a visit to the local loan shark.  Then there was always the pawn shop where you could hock your watch for a temporary loan.  Today and entire industry has grown up dealing only with payday loans.

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.

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?

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. 

That they target areas of poverty goes unquestioned.  83% of payday loan shops are located within  mile of areas designated as pockets of poverty.  This compares to 51% of credit unions and 34% of banks.  In essence, payday loan shops are providing banking services to a population in an area that banks do not want to be in. 

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.

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.

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.

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