11415401116_1c9c55b68e_oHave you ever used a payday loan? These short-term loans are available to the people who may not qualify for a bank loan or a credit card. Payday loans are “the equalizer” of the financial world, a safety net for those in need of emergency funds.

If you have, you already know how quick you can get your money, and how easy it is to pay it back. For everyone else, you might have fallen victim to a campaign of misinformation about the payday lending industry.

Here are the three biggest myths and misconceptions…

Payday Lenders Charge 1000% Interest

You may substitute “3000%” or “5000%” if you would like – the point is that payday lenders have acquired a reputation of charging staggering APR. This is a misconception fueled constantly by the anti-payday lobby. Is it true? Yes, but not in the way you think.

Think of it like this – would you pay $45 to rent a DVD? Would you pay $15? No, that price is simply too high. But $1.50 is a fair price.

So you rent a movie for $1.50, but then you forget you have the movie and keep it for 10 days. Now you have paid $15 to rent that movie. If you lose that movie for 30 days, then you have paid $45 for that movie.

You were never intended to keep the movie for that long, but you did, and now the reasonable price has turned into something else.

Payday loans are no different. When critics rail against the APR (annual percentage rate) of these loans, they are overlooking the fact that payday loans are short term. They are intended to be paid back from your next paycheck. The longer you don’t pay the money back, the more you will owe.

Using APR is faulty logic, because these loans are supposed to be for one to two weeks, not 52.

Payday Lenders are Loan Sharks

Mobsters in the 20s and 30s were not the first shady lenders to loan money for high rates of interest, but they were the ones who popularized the term “loansharking.”

6209753987_80bac44c74_zIf you borrowed money from a loanshark, repayment of the loan was not optional. Threats, public shaming, and even violence were par for the course if you took out this kind of illegal loan.

So why did so many people take the loans? Because back then, just like now, banks are only concerned with large loans, and small dollar loans were criminalized, which gave criminals a monopoly on them. Ironically, the mobsters soon went the way of banks – small dollar loans were too much work with too little payoff, so they moved up the ladder to make illegal loans in larger amounts.

Payday lenders of our day and age are not loan sharks. They do not use threats, public shaming, or violence. More importantly, they are not making illegal loans. Todays lenders are constantly scrutinized, and operate within the letter of the law.

Payday Lenders Target the Poor

  • 39% of payday loan borrowers make over $40,000 per year.
  • 85% of borrowers also use other forms of credit.
  • 90% of borrowers have a high school diploma, or higher level of education.
  • 100% of borrowers have steady, regular income and active bank accounts.

These are statistics always overlooked by critics of payday loans, because they paint a more accurate picture of the typical borrower.

Payday lenders do not “target” neighborhood, communities, or minority groups. These lenders appeal to the disenfranchised in our society, those who cannot (or will not) go to banks or major credit cards. Does this make them somehow villainous, for catering to the large percentage of Americans who is not being served by the traditional financial system?

No, the truth is that payday lenders are business owners offering a product that no one else is offering. Those who take out payday loans are not stupid poor people being preyed upon, they are sensible hard working people who needed a little extra, and made an informed choice.

 

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