subject: The Controversy Surrounding Payday Loans [print this page] In recent years, there has been a growing trend that has seen many new payday loan specialists cropping up all over the place. The payday loan business seems to be booming, but with that success has come quite a bit of criticism, as well. The controversy surrounding payday loans has had people on both sides of the argument saying some pretty bold things. What is the truth, though? Are payday loans inherently bad, or are they just misused by those that take the loans out?
First of all, you have to look at the philosophy behind loaning money as a business activity. When you put money in your savings account, you are actually letting your bank borrow your money. As a result, they pay you back a certain amount as interest. In the meantime, they are actually investing your money elsewhere, and someone else is paying them interest, too. In other words, other than a casual loan from a friend or a family member, no one simply lets someone else use their money for free.
Payday loans, at their core, are not much different from any other type of loan, including student loans, auto loans, home loans, or other loans for various purposes. The company or financial institution loaning the money does so with the understanding that you will be paying them back more than what they loaned you at an agreed-upon time. The main difference, of course, has to do with the fact that payday loans are much more expensive in terms of the annual percentage rate, or APR, that companies charge to those who take them out.
There are actually a couple of reasons that the percentage rate is so high on payday loans, though. One reason is that payday loans are designed to be short-term loans, hence their name. With a payday loan, you are often borrowing money for a week or two, or maybe even just a few days. As such, payday loans would recoup very little money for the creditor if they charged an annual percentage rate similar to that which a bank charges for a loan, or even what a credit card charges. On a two-week payday loan of $200, a payday loan would only make about 75 cents for the business at the APR of even a high-APR credit card. Think of how many such payday loans would be required to sustain a business, pay employees, take care of rent and building expenses, and more.
Furthermore, companies that specialize in payday loans do so for a very specific group of people. They extend short-term loans to those who often have very bad credit or a spotty history of repaying debts. As such, they assume a lot of risk in collections while issuing these loans. In the financial world, higher risk always results in a higher APR. This is true with credit cards, bank loans, and everything else, not just payday loans. In terms of the above example, just one unpaid payday loan would require hundreds of successful loans simply to cover the expenses incurred, which would prohibit payday loan companies from even succeeding.
While there has been a lot of controversy surrounding payday loans, an objective look at them reveals that the higher fees that are charged come with legitimate reasoning. Furthermore, other financial instruments such as long-term loans and credit cards can be financially harmful if they are not used correctly, as well. Ultimately, it is up to the consumer to be responsible and only take out loans that he or she is able to repay in a timely fashion.
