Payday Loans-How Do They Work?
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 small, unsecured loans granted over a short period of time. Depending on state regulations, payday loans can be for as little as $100 to as much as $1500 and are typically paid back over a period of 7 to 30 days. They are designed to provide emergency funding for expenses that need to be paid before the next paycheck arrives.
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.
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.
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.
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.
Payday loans are small, unsecured loans granted over a short period of time. Depending on state regulations, payday loans can be for as little as $100 to as much as $1500 and are typically paid back over a period of 7 to 30 days. They are designed to provide emergency funding for expenses that need to be paid before the next paycheck arrives.
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.
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.
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.
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.
About the Author:
Chris A Smith reports on consumer credit and finance. To learn more about payday loans, debit cards, credit repair, budgets and simple family finance advice, visit http://trycreditfix.com
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