subject: Payday Loans, Cash Advance- easier and cheaper [print this page] Payday Loans, Cash Advance- easier and cheaper
A payday loan is a small loan (maximum $500-$1,000) that does not require a credit check. Payday loans have short terms and must be paid back quickly, usually within a few pay periods. Payday Loans are marketed as a way to help you cover your expenses until your next paycheck.
The clients of payday loan companies were mainly government employees, low-level white collar workers, skilled-tradesmen and foremen. Payaday Loan companies served the borrowing needs
of moderate income workers. The small loan business was illegal in those times. But the usury laws were seldom enforced, and the small lending prospered because it fulfilled a real need.
Eventually, the payday loan industry became a target of reformers, who prosecuted the illegal small loan companies. However, they realized that the need existed and that it was impossible to make a profit on small loans with a 6% interest rate. Therefore, they proposed higher rates limits for payday loans in exchange for licensing and regulating of lenders granting such credit. Many payday loan companies came to accept such proposals, and in 1917 a committee of reformers and small loan companies agreed on model legislation, the Uniform Small Loan Law. The subsequent passage of small loan legislation in many states enabled creditors to make small loans profitably and allowed emergence of the modern finance company industry.
The cost structure of the consumer finance industry is such that operating costs increase less than proportionately with loan size. In other words, companies producing larger loans have lower costs per dollar of credit than companies producing smaller loans. Thus, for a given interest rate, larger loans are more profitable than smaller loans. Because of increased competition unleashed by deregulation of financial service markets in the 1980s, many finance companies, which historically served the very small loan market, shifted their business to more profitable, large consumer loans.
Banks offer revolving credit (bank cards and check credit) to satisfy small and short-term credit needs, but many consumers still have limited access to such credit despite the development of a subprime market for bank cards.
Pawnshops were another source of small, short-term loans. Compared to the small loan companies, pawnbrokers catered to lower income, working-class customers. The difference in customer profiles suggests that pawnbrokers and small loan companies may have served different market segments.
The payday loans industry emerged during the 1990s to serve a void created by the withdrawal of traditional lenders from the very small loan market. Payday advance credit is
different from the small loans offered by finance companies. Payday advances are single payment loans rather than instalment loans, and the underwriting process for payday advances does not involve a credit investigation. Therefore, the costs and risks of the two types of credit are not the same. However, it is likely the factors influencing the demand for these products are similar.
The rising demand for very small, short-term consumer loans is shown by the growth in the payday loans industry. The payday advance offices grew in numbers from zero offices in 1990 to over 10,000 offices in 1999.
