The Truth Behind Payday Loans

Payday loans are creating tidal waves of controversy. Critics accuse payday lending services of charging exorbitant rates. They accuse payday loans of perpetuating a vicious cycle of debt. Worse, they accuse these services of taking advantage of the poor.
But are payday loans the evil incarnate its critics have painted them to be? Are they nothing but mere tools to further the wealth of “capitalists” and “corporate America”?

The truth is payday loans do charge interest rates higher than conventional loans. A $100 loan with a term of 14 days typically carries a fee of $15. If one were to compute for the annual rate of this $15 fee, then the resulting rate is indeed gasp-worthy.

Payday loans, by the nature of the loan, are meant to be a short term loans. They are meant to provide instant cash for that in-between paychecks period. The gasp-worthy annual rates will never materialize because they will never reach 1 year.

Payday loan clients are mostly low-income earners. Statistics show that these low-income borrowers are high-risk borrowers. Most of them have poor credit scores; most have multiple outstanding bills that are probably in collections. Since the clients are high-risk borrowers, it is only fair that payday lenders charge higher interest rates. The high interest rates compensate for the high-risk borrowers and the short term of the loan.

Payday loans do not target or take advantage of the poor. Payday loans answer the needs of low-income and high-risk borrowers.

Bad credit scores and collections cases are the kiss of death for line of credits, second mortgages and personal loans. The truth is traditional lending institutions such as banks are unwilling to extend credit to this high-risk clientele. They also have a built-in bureaucracy that intimidates and delay the application process for loans.

Payday loans do not perpetrate the debt cycle. If the borrowers find themselves in debt, it is because they have a predisposition to being in debt. This predisposition may manifest itself in payday loans but so can it with conventional loans. The predisposition is the cause for the debt, not payday loans.

Payday loans have features that are legitimate sources of alarm. Given the context in which they came about and are used, one can argue that these features are necessary. The important thing is that payday loans answer a very real and pressing need of the low-income groups that the traditional lenders have historically been unwilling to answer.

Tags: Easy Payday Loan, Finance, Cash Advance, Paycheck Loan, No Fax