TACF Articles

Payday loans have been around ever since there were people with money to loan and people who wanted to borrow money. Sometimes they were called loan sharks, sometimes pawn brokers and today they are called payday loan stores.

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.

If an unexpected bill hits before payday, people with good credit simply put it on their credit card. If you don’t have credit, or you have bad credit, and you don’t have the cash, how is that bill paid? If it wasn’t for payday loans, that bill wouldn’t be paid. If the loans are providing a valuable service, why then do some people call them 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.

Payday loan companies do target poor areas. In fact over 80% of their stores are located in areas designated as distressed or poor. Banks on the other hand, stay away from those areas with only 34% of their total facilities serving poor areas. When you are the only game in town, as the payday loan people are, you can pretty much charge what the market will bear.

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.

It would not be surprising to discover some banks planning to enter this lucrative market at some point in time. Today however, they do not serve this market in any significant way. Payday loan customers actually see the loans as their safety net. When the $100 utility bill is due four days before you get paid, where else can you go to get the cash to cover it. The $30 that the $100 loan will cost is just the cost of doing business. Paycheck loan customers do not view these loans as an ongoing resource but rather a one time expense.

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.