If you're new here, you may want to subscribe to my RSS feed right now, before you forget, to get the latest posts. Thanks for visiting!

I often listen to the hatred and disgust from many people regarding payday loans. People feel that payday loans screw consumers and lead to massively high interest rates. They also hate payday loans because they have heard other people bitch and complain about them rather than think through all of the issues.

Payday loans are expensive, the interest rates are high and they can be abused. There is no doubt or dispute about any of those facts. But one part of the argument that does not seem to come up is that traditionally, neighborhoods that had a concentration of payday lenders that lend money through payday loans. But if you stand on any given corner in those neighborhoods, as I have, and look around it isn’t what you will see that is important but what you won’t see.

What is typically missing in payday loan neighborhoods are major commercial banks. They don’t want to locate in payday loan neighborhoods. This lack of equal access to main street credit leaves people in traditional payday loan neighborhoods left with only a few options.

Logically the need for a payday and loan does not seem sensical. But there are a few situations in which a payday loan might be a logical solution. Take for example the situation that many face, they are waiting for payday, don’t have any extra cash in the bank and something goes wrong with the car they need for work. What options do they have? Let’s look at them.

Option 1. - They could put the repair on a credit card if they had a card with a credit line to cover the repair.
Option 2. - They could ask a friend or family member for cash.
Option 3. - They could raise money by pawning an item.
Option 4. - They could go to the local bank for a small short-term loan.
Option 5. - They could make alternative transportation arrangements.
Option 6. - They could get a payday loan.
Option 7. - They could get a payday advance or loan from their boss.

One of the reasons that payday loans are expensive is that they are traditionally for small amounts. Take a look at this payday loan company online and look at the APR disclosure page. What you will see is a mind bending interest rate that when annualized is 506.94% but when you look at it as a $100 loan for 18 days and the person is charged a $25 fee for that loan, that does not seem so unreasonable.

I can remember a time in my life when I would have been happy to repay $500 for a $400 loan when I was in need. It was back in my college days and my car had broken down 2,000 miles from home. I was a student and had a campus job but no credit or cash in the bank. When I got paid I could have repaid the money due but I needed my wheels to get to class and work. I didn’t go to college in a town that had mass transit and everything was too far to walk to.

Typically people that seek out payday loans are not A+ credit folks. Payday loan borrowers are typically higher credit risks and with risk comes higher interest rates so we should expect the interest rate to be higher. In countries other than the US even main street lenders are charging an annual interest rate of 90% or more on high risk loans.

But is $25 an unreasonable amount to charge for a payday loan? Actually it probably isn’t. When you apply for a loan for a mortgage borrowers typically pay “points” or fees associated with a loan. When a borrower is charged 1 point on a $400,000 loan they have to pay $4,000. That’s a lot of money. And yet some of the very same details need to be handled for a payday loan, like any other loan.

All loans carry some amount of administrative charge to deal with the loan. This is the typical admin B.S. paperwork and processing and if the loan is for $100 or $10,000, these admin costs occur. Now if I tacked a $25 charge onto a $10,000 loan you’d say it was insignificant but on a $25 people think it is egregious.

Where People Get Into Trouble With Payday Loans

But people that take cash advance and payday loans online or those that just walk into a pay day loan office get into trouble with pay day loans when they either only pay the fee and not pay off the original amount, thus keeping the loan rolling forward, or when they take out yet another payday loan to pay back charges.

Payday lenders are severely criticized for allowing this to happen but let’s not forget that the major credit card lenders will gladly let you take out a cash advance to pay your bill and then charge you the highest interest rate for do so.

Anytime you are borrowing money to pay bills, it is bad news and does not typically have a happy ending.

Payday and Loan Provider

As an employer I have been known to advance money in the past to a good employee to meet short-term obligations. Unfortunately I don’t do that anymore. From the pain of practical experience I learned that if I advanced money that it then created an uncomfortable obligation between the employee and me or if I deducted it from the next payday check that the comment I heard the most was, “please don’t”.

The Payday Loan Pitch

We’ve all seen the ads. My favorite was from a guy called the Loan Ranger in Nashville. I still laugh thinking about that one.

Budget Stretched Thin? Get $1,500 wired to you in One Hour! No credit checks. Apply Now and get the cash you need today!

If you needed a loan fast, would that advertisement get your attention?

When a Payday Loan is Needed Fast

Here is a real example of a past client that needed a fast payday loan. She was ten days away from getting paid and she awoke to find that her hot water heater had rusted out of the bottom of the heater. She had no spare cash in the bank, no access to available credit, no family to borrow from and no local plumber would install a new heater without payment in advance.

She went to Home Depot and even they turned her down for credit for a new hot water heater and installation. So this lady, in a desire to have hot water for herself and her kids went to a payday lender for a fast loan. She got the loan, got the hot water heater replaced the next day and she and her kids hat hot water again. On the next payday she repaid the loan.

What would you have done in the same situation?

Faxless Payday Loans, Fast Payday Loans, and No Fax Payday Loans

All of the advertising messages promise one thing, cash fast. But don’t we hear those same messages from our credit card companies? Cash advance now, instant balance transfers and the like. Promises of fast cash is not a new advertising message.

oldpayday1.jpg

Photo by ellievanhoutte

The idea of selling loans fast is not a new technique at all. Look at the sign above. Even with todays promises of payday loans online or payday loans fast, who can beat a 1 minute approval process?

Payday Loan History and Arthur Ham

Arthur Ham was a graduate student of Columbia University, who, in the early 1900s, studied small-loan lenders in detail.

Ham first concluded that finance companies of the day were causing a hardship on workers by charging high rates of interest.

However, after he led the campaign to pass usury laws to limit the amount of interest that could be charged, Ham completely reversed his position.

He originally felt, as do many people then and today, that high interest rates were an indication of shameless profit. However, as he became better acquainted with the loan industry, he discovered how interest rates for these loans were determined and why they were necessary.

Since the new lower, “protective” interest rates enacted were too low for small finance companies and philanthropic lenders to take on the risk of low-dollar borrowers, people had no place to turn for these small loans. After realizing what was happening, Ham moderated his views and worked with lender organizations to find a way for small finance companies to exist while eliminating the undesirable “loan shark” element. [from the History of Finance Companies]

-----

If you enjoyed this post be sure to grab the RSS feed or get posts by email so you don't miss a bit of what's to come.

Steve

Related Posts