Money is the fuel for survival and continuance, and solutions for financing personal and business needs have been in existence ever since trade and commerce opened up the world. Likewise, payday loans have evolved with the passage of time with the sole aim of enabling people to meet their immediate needs. It is a demand and supply situation where there are people with money to loan and people need to borrow money. The people who loan money are popularly known as loan sharks, pawn brokers, and today they are known as ‘payday loan stores' with a certain kind of privatized business entity that has its own set of rules to operate.
The characteristics of paycheck or payday loans are - they are unsecured, short term, and typically are not greater than $1500 (normally much less). A payday loan is designed to help people when their money runs out before their salary paycheck arrives. These loans are generally for a short term between 7 - 28 days.
If an unexpected expense hits before payday, normally those with good credit would simply put it on their credit card. However, if one does not have credit, or a bad credit rating, and no liquidity, it is difficult to meet any immediate expenses. If it was not for payday loans, that expense bill would not have been paid. If payday loans do provide valuable service in the hour of need, why does a section of people term this lending business as a rip-off?
In the lending business, the interest rates could be astronomical, which would qualify these loans as a rip-off. Coping with high interest rates is a drain on anyone's pocket. It bleeds the effort of the borrower, to toil and earn that money to repay in full, which again leaves him in a cash crunch. He would then need to depend on a payday loan once again, and be caught in a vicious cycle of debt. Consumer activists have raised an outcry against the high interest rates and call for more regulations in the industry. The lending industry denies the fact that the rates are unsupported, and claims that the rates are high in order to cover the 25% default rate and the cost of operating businesses in low commercial areas. As a measure of practicality, the cost of a payday loan is $30 for every $100 borrowed. In addition to this high rate, the fact is that payday loan companies generally operate in poor neighborhoods, and hence appear to prey on the livelihood of the poor. More than 80% of such lending firms are located within a quarter of a mile from poor neighborhoods. The poor people are the lowest section of the society ignored by the banking community. Payday loans charge such high interest rates because no one else is catering to the needs of the poor.
How do these lending companies get away with such high interest rates? Who would agree to such terms? There may remain many unanswered questions for long.
