Payday Loans Target The Poor
June 15, 2009 by Chris A Smith
Filed under Bad Credit
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 designed to help out a person who finds themselves temporarily short of funds. They are not designed for long term financial commitments like auto loans. Typically a payday loan will be less than $1500 and more likely be in the $200 to $300 range. They are short term loans, usually lasting the time between paychecks or 7 to 14 days.
Everyone has found themselves in the position of running short on cash. People with good credit fill the shortage by using their credit card. People with no credit or bad credit use payday loans. On the surface this looks like a legitimate service that provides a source of credit to a population that would otherwise be without credit. Why would anyone think that this service is a rip off?
The answer of course is the interest rates charged. Depending on state regulations, the interest on a 7 day loan can be as high as 500% when annualized. A $100 seven day loan can cost the borrower $21 in interest. Consumer advocate groups call these rates outrageous and contend that the payday loans are predatory and target the poor.
That they target areas of poverty goes unquestioned. 83% of payday loan shops are located within mile of areas designated as pockets of poverty. This compares to 51% of credit unions and 34% of banks. In essence, payday loan shops are providing banking services to a population in an area that banks do not want to be in.
The service they provide, small, short term loans is also a product that conventional banks have no interest in. The only thing required to be approved for a payday loan is a verification of identification, proof of income, and a checking account. No credit check is performed so there is no inquiry on the borrowers credit report. Loans are processed typically in a single day and the funds are wired or ACH to the borrowers checking account.
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.
Payday loans have found a new market thanks to the high unemployment and housing disater. Persons formerly holding “good credit” ratings are now finding themselves with bad credit ratings and being locked out of conventional credit access. The loan companies have all jumped on the internet where this “new” market lives. Online loans are identical to the shop loans but are much more convenient.
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.
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