Payday Loans Overview

Posted on Saturday, July 11th, 2009 at 4:08 pm in Cash Loan Info by State

The payday loan industry has been around for many years, but has grown rapidly over the past year or two as the mortgage crisis and economic slowdown have started to bite the middle class as well as lower-income Americans. Gasoline, food and other basic necessities are getting more expensive and more people are losing their jobs or their homes, or running into credit card problems.

In the current economic climate, the payday loan providers are seeing their client base expand. Many people who used to be financially secure now have bad credit ratings and are unable to get a credit card or a bank overdraft. They are turning to payday loans to fund sudden large payments, or even to carry them through the last few days before payday.

Traditionally, the typical payday loan customer is a low-income, non-college educated person without a bank account, and is likely to be a member of a minority group. That person lives from paycheck to paycheck and has no savings to draw on in case of a financial emergency. He or she might also be a legal or illegal immigrant.

Millions of people in the U.S. work for minimum wage and don’t have bank accounts. Many of them do casual or hourly paid work and don’t even have a guaranteed income. They might be farm workers, fishermen, laborers, cleaners or factory employees. These people are sometimes referred to as the unbanked, and form the core customer base of the payday loan companies.

In many cases, they have to rely on payday loans to get by when they cannot find enough work. Sadly, for many of the unbanked, getting a payday loan can make the difference between eating and not eating that day. Since they fall outside the formal, organized economy, they have to use whatever options are available to them, even if those options end up costing them more money.

Payday loan providers are often criticized for charging far higher fees than mainstream lenders such as banks. Nonetheless, for people who don’t have bank accounts, the payday lenders perform an important function by giving them access to short-term financing. If they did not exist, their clients would be forced to seek the services of less scrupulous, unregulated lenders. Wherever they are allowed to operate, payday loan companies are regulated by the state government, and provide legal, well-organized services.

If a customer takes out a payday loan to fund an emergency, and then pays the loan back on the due date and does not extend it, they can often end up saving money compared with the charges they would otherwise be paying. For comparison, here is a list of alternative payments with annual percentage rates (APRs) for two-week terms:

$100 payday loan with $15 fee = 391% APR
$100 bounced check with $48 NSF/merchant fees = 1251% APR
$100 credit card balance with $26 late fee = 678% APR
$100 utility bill with $50 late/reconnect charge = 1304% APR

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