The Price of Convenience

Payday loans are easy to get. Some companies lend electronically by automatically depositing and withdrawing funds from a one’s bank account. The typical payday loan customer does not use a bank. The customer therefore must provide evidence of a bank account and a pay stub. He or she may also be asked to provide a driver’s license, bank statement, and telephone bill. Usually, it takes little time for processing. Most companies do not require a credit check for loan applicants. Results are quick cash in hand.

A study conducted shows that because of these privileges the payday loan industry provides, a customer will pays an average annual percentage rate nationally of four hundred seventy four percent. Research has also shown that interest on loans between one hundred and four hundred dollars got as high eight hundred seventy one percent. A study also found that one third of the surveyed payday lenders charged an annual percentage rate of five hundred percent for every one hundred dollars on a loan. Because payday loans are short term and intended for occasional use many state and local usury laws have made these loans exempt. In seventeen states such loans through caps and interest rates have been banned or prohibited. The industry’s original intent was to dive loan sharks out of business so regular businesses could make small loans to individuals.

Soon after the “birth” of payday loan companies, branch banks began to disappear in many communities. Today payday loan companies are the major banking source for low-income and working poor consumers, residents of minority neighborhoods, and those with blemished credit histories. The product revolves around small, short-term, high-cost financial transactions. The future of payday advance companies looks prominent. Because state legislatures allow payday lenders to charge fees that are moderate in absolute terms, but translate into extremely high and profitable compound interest rates and the demand for short-term loans is strong due to a steady increase in the number of people with impaired credit, the payday loan industry will continue to grow.