In Defense of Payday Loans

posted on 3 January 2012 | posted in Uncategorised

Payday loans are short-term, unsecured loans taken out by borrowers to tide them over until the next pay check. Loan value is usually low, seldom exceeding three figures. The loan process itself is fairly straightforward, with borrower presenting a post-dated check to lender in exchange for cash, less lender’s fees. On the agreed date, borrower pays the loan back and the check is returned. Should borrower fail to pay as agreed, lender may redeem the check resulting in bank overdraft charges.

Payday lenders have been around for some time, many of them have become established franchises gaining a strong following with the weak economy. These cash advance financiers cater to a class of workers who have little or no credit and require emergency cash immediately. Admittedly, interest rates are rather high, with APRs reaching 500% in some cases. However, this is a high-risk business for lenders because of the risk of default. Payday lenders cover the costs of bad loan write- offs, often a significant chunk of their operations. An industry report from North Carolina indicates that bounced checks comprise as much as 25 percent of payday lenders’ assets.

Furthermore, the practice of paycheck advances is meant to be a one-time, emergency-only deal. However, borrowers become trapped in the system when they habitually roll-over existing loans so that fees accumulate until the debt becomes unmanageable.

Payday loan providers have found an underserved niche market in borrowers who are constantly experiencing a cash crunch due to low pay, high expenses or unforeseen expenses. The demise of many small banks and a tight credit market has made it even more difficult for this demographic to obtain low-value, short –term loans. Payday lenders provide the financial services that would otherwise be unavailable to those in dire need of fast cash.

Payday lenders have also been accused of predatory practices because they choose to locate in economically depressed areas and their clientele are mostly the “unbanked” sector. The truth is, the nature of the business defines the location. As such, low-rent, high traffic areas are favored by payday lenders because those fit their business model.