Payday loans get a bad rap: from the government, from the banking industry, and from the media. And let’s be honest, that bad reputation didn’t come from nowhere, it was earned by unscrupulous lenders, fly-by-night companies, and predatory practices.
Not every payday lender is crooked – in fact, most are not – but the bad apples have tainted the whole bushel and now many people think the entire industry is a scam.
This is a shame, because payday loans are important to a lot of folks, and serve as a sort of safety net for hard-working Americans who cannot or will not be helped by the banks.
In other words, payday loans are a vital option for people to have. When the government tries to put the squeeze on lenders, ultimately they are hurting citizens, not businesses.
The Flimsy Argument Against Payday Lenders
Payday loans (also called paycheck loans or cash advances) are short term unsecured loans made from a private lender to an individual. These loans are usually for small amounts — $100 to $500 – and designed to be paid back from the borrowers next paycheck.
These loans are risky for the lender. There is no collateral put down, and therefore a much higher rate of default than bank loans. Because of this, payday lenders charge higher interest rates than banks. Sometimes called interest, other times called “fees,” the industry standard is about 30% of the amount borrowed.
The loans are short-term in nature, and when a borrower does not repay the loan in full from the next paycheck, those fees can begin to pile up. Much has been made of the APR (annual percentage rate) of payday loans being so high… but payday loans aren’t supposed to have an APR. They were never intended to be paid off over the course of a year, but over the course of a week or two.
And yet every day people make partial payments that are the equivilant of treading water. Just like with credit cards, making the minimum payment each time will never get your debt paid off. When treated as a long term debt, a payday loan can cost you a lot of money – way too much money, to be sure.
But when they are used as they are intended, a cash advance is nothing more than paying 30% to borrow a few bucks until payday. Nothing more, nothing less.
Why Payday Loans are Important
Pretend, for a moment, that you are in the middle of a financial emergency. Your car broke down, and you are stuck in a small town far from home. Most people would just whip out a credit card to get the car fixed. Or they would find an ATM and get the cash they needed.
But for the 34 million households in the US – over 60 million people – that are underbanked, and do not have cash reserves or even a credit card to fall back on, they have very few options. Unless they have a relative who can use a wire transfer to send them cash directly, they may have no options at all.
Except for payday loans.
Unlike a bank loan or a credit card, a payday loan does not require good credit. It involves a simple application form that only takes a few minutes. You get your approval (or rejection) almost instantly, and in many cases can get your cash that same day.
Hopefully, you never are in a financial pinch like this. If you can go through your whole life without ever being in this position and taking a payday loan – that’s great. But these loans aren’t important so a blue collar worker can get his beer money early, or so a college co-ed can get some new clothes. Payday loans are important because they are the last, perhaps the only, choice for people who need cash quickly.
If this option is no longer available, where will these people turn?
Banks do not like payday loans. Why? Because they don’t like anyone else lending money. It’s just business – they want all your money. They often claim moral high ground over payday lenders, but the big banks have a much longer tradition of corruption than the payday industry.
The Government does not like payday loans. Why? Well, partially because the massive banks and financial institutions contribute to thousands of political campaigns every year. Politicians do not want to bite the hand that feeds them.
The way payday loans are condemned by Elizabeth Warren and others would lead you to believe that payday lenders are nothing but loan sharks trying to hustle people out of their hard-earned pay.
Payday lenders are not loan sharks. While some of them are shady, have you ever heard of a case of a payday lender breaking someone’s thumbs? No, you haven’t, because lenders aren’t criminals, they are LENDERS. People like to use hyperbole to attack the industry, but in truth the average payday lender is a person who owns a business and wants to make a living.
Before there was an organized, regulated lending system in place, borrowing money from shylocks and gangsters was not unusual. Why? Because people had no other choice if their back was against a financial wall. Now those days are behind us, because there are other options, legal options.
If payday loans ever were legislated out of existence, or made illegal, then loan sharking would make a grand return. Aside from the shylocking industry, how would that benefit anyone?
What Does it All Mean?
You may not like payday loans. You make think they cost too much. That’s ok. This is a niche product, for a small percentage of working Americans. The point of this isn’t to convince you that everyone should love payday loans and get them all the time.
No, the point is that some people need them. They are an important option for people who have few financial options. These lenders offer something no one else offers to a segment of our population that are overlooked by the big banks and government alike.