What are Payday Loans?
You have heard about them, their storefronts are springing up everywhere and now they are appearing as online businesses: payday loans. What exactly is a payday loan and how does it differ from a traditional loan?
The term payday loan refers to a small loan taken out for a short period of time, usually the time span corresponding with the borrower's pay cycle. The normal procedure is this: the borrower visits the storefront of a payday loan establishment shows proof of employment and identification. After writing a post dated check the client is then given the money they have requested.
The borrower is expected to return after their next payday, a day that has been agreed upon by both the client and the establishment, to repay the loan plus interest. If the loan is not repaid the payday loan company will cash the check written on the previous visit. In the event of insufficient funds to cover the check the loan begins to accumulate additional fees and interest plus the borrower now must contend with bounced check fees imposed by their bank.
Although the norm is for the loan company to require employment and income verification different payday loan companies and individual franchises may be more lenient in what the client must produce prior to getting a loan.
This business is booming either because people have no other recourse for emergency funds or, in the case of borrowing from more financially secures friends or family; choose to pay the interest instead. Now payday loans have moved online where potential borrowers can fill out the application and, if verification is required, fax the paperwork. Loans are transferred by direct deposit and repayment and finance charges are electronically withdrawn from the borrowers account.
Are payday loans good, bad or neutral? That would depend on who you ask. The short-term loan business must be filling a need or it wouldn't have expanded so rapidly, but at what cost to those who are doing the borrowing?
The typical payday loan clients have low income and few assets. They may also have a low credit score. These people have little "wiggle" room and even a small unexpected expense such as a blown tire or broken water pipe can prove disastrous. For these people a quick, easy to obtain loan can be a life saver.
There is, of course, another side. Payday lenders have been accused of exploiting the poor with what many perceive as criminally high interest rates. Lenders are said to target those with the least economical expertise and experience: the poor and the young.
Payday loan companies say they need to charge such high interest rates to cover the cost processing and still make a reasonable profit. However, according to their critics, since they don't do full credit checks, but rely only on recent proof of income or no proof at all, these companies don't incur the same costs that a bank or credit card company would. They do, however, have a larger default rate to contend with.
Are their customers also their victims? What some call the "democratization of credit", giving access of credit to those who traditionally haven't had such an option, others refer to as the victimization of the poor and undereducated who are being lured into a "debt spiral".
With so much money at stake the question of how much right or moral obligation a government has to protect its citizens from themselves, compared to how much risk an adult should reasonable be allowed to assume, will continue to be news.