TAPF Articles

Payday loans, and advances on pay have been around since people paid other people to work for them. The need for small short terms loans has always attracted lenders willing to accomodate. When banks can’t or won’t accomadate a market need, others will step in. Loan sharks ran very profitable, although illegal, businesses. Pawn shops were there to provide temporary loans in exchange for property. Today there are paycheck stores in every poor area of our cities.

Paycheck loans are unsecured, short term, and typically are not greater than $1500 and usually much less. The payday loan is designed to tide a person over when their money runs out before their paycheck arrives. Consequently these loans are for 7 to 14 days.

If an unexpected bill hits before payday, people with good credit simply put it on their credit card. If you don’t have credit, or you have bad credit, and you don’t have the cash, how is that bill paid? If it wasn’t for payday loans, that bill wouldn’t be paid. If the loans are providing a valuable service, why then do some people call them 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.

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.

The interest rates are outrageous. However, payday loan customers see the service as a real value. Where else can a person with no credit or bad credit get a loan to pay for an immediate need? Payday loans are simply servicing a financial market that conventional banks and loan companies believe is not profitable, otherwise there would be Bank of Americas next to every bodega in the poor areas of our cities.

Our economy is making payday loans even more popular and this time with a whole new group of people. With the housing meltdown and unemployment near 10%, people who formerly could rely on their credit card to fill the gap now find themselves maxed out or without credit at all. The loan companies realize this and are reaching out to this new market via the internet. Online loans work the same way as the shop loans only they are more convenient to apply for. Needless to say it’s cheaper for the loan companies to do business online than in a brick and mortar store.

If you find yourself contemplating using a payday loan service, make sure the company is licensed to do business in your state. Also make sure you understand the interest rate and the consequences of not paying off the loan on time.