SLSF Articles

People have been taking out what we call payday loans since time began. Many times it was called an advance that you would get from an employer. On the seedy side it may have been a visit to the local loan shark. Then there was always the pawn shop where you could hock your watch for a temporary loan. Today and entire industry has grown up dealing only with payday loans.

Payday loans are small, unsecured loans granted over a short period of time. Depending on state regulations, payday loans can be for as little as $100 to as much as $1500 and are typically paid back over a period of 7 to 30 days. They are designed to provide emergency funding for expenses that need to be paid before the next paycheck arrives.

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?

Consumer advocate groups contend that the payday loan industry is charging interest rates that are far in excess to what they need and that they are targeting poor people. Interest rates as high as 700% APR are not uncommon. Each state sets the rules for the industry and consequently the interest rates and other terms vary state to state. So a person with no credit or bad credit is charges 700% where a person with good credit would be charged 14% on their credit card.

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.

Why aren’t banks providing these kind of loans? For starters they are just too small. Banks are also locked into procedures and are regulated regarding their lending policies. Payday loans only require verification of ID, a checking account, and proof of employment. There is no credit check and no inquiry goes on the consumer’s credit report. Loans are typically wired into the applicant’s bank in a single day.

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.

With unemployment nearly at 10%, payday loans are now tapping into a new market via the internet. Scores of payday loan companies are now reaching the formerly good credit customers who now find that there credit has taken a dive and are unable to obtain conventional lending. Online loans work the same way as the shop loans and are fast, convenient and offer the financial support that is not available otherwise.

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.