Since its origin in the early 90's, the payday loan industry has had to prove its validity time and time again. Today, it still remains a controversial topic. In some senses it is a fight between the rich and the poor, the competitors and the consumers. So, who is to say what is right? It may just be thought of as a matter of opinion, but in such a widely spread and heavily used industry, it all comes down to facts and numbers. Who is really winning and who is losing? Most importantly, what is the REAL issue?
We are all at least somewhat familiar with the payday loan industry. It has been created to help people in need of some extra money between pay periods. Payday loans are usually required to be paid back within two weeks, so there is a limit of $100 to $1500 that a consumer can borrow per loan. Because the payday loan industry would not make a profit off simply letting people borrow the money, there are interest fees added. If $100 was borrowed, for example, then there would be an average fee between $15 to $30. Seems fair enough, right? Now, say a consumer borrows $100 with a $15 interest fee. When you calculate the fee in terms of APR (Annual Percentage Rate) by multiplying the fee by the number of two-week pay periods in one year (which is 26), then the result is an APR of 390%. This means that the lender is making a 390% yearly profit off of the loan.
In April of this year, Ohio became the most recent State to establish a cap on the payday loan APR. They set it at 26%. While this may seem like good news to the consumer, it is quite the opposite. At 26% APR, there is only a 1.08% profit being made every two weeks by the payday lender. Ultimately, it is not enough to keep business going. As a result, the payday loan industry in Ohio is diminishing, putting over 6,000 people in unemployment. Not only has that, but the number of late fees and bounced checks almost doubled in the past few months.
Not surprisingly, banks are one of the top industries opposing payday loans. Their claim is that payday loans take advantage of innocent consumers by coning them into paying high interest fees. Now, let us look at some facts. Payday loans are, for the most part, used by low-income consumers with credit or debt problems. They are convenient because they do not require good credit or a debt-free record. These consumers will use the loan to avoid a late payment on a credit card or maybe just to buy needed groceries. The loan is then paid off two weeks later and everyone can walk away happy.
Now, let's say payday loans are not available to the consumer. One individual has a payment due on his bank credit card but will not have the funds available to pay off the debt on time. The credit card bill is now late and there are plenty of fees attached to it. There is a 600% APR late fee profit to the bank. In addition, when the individual finally gets paid, his deposited check might bounce due to the late fee. This is a 2700% APR profit for the bank. As you can see, payday loans are a threat to banks only because they help consumers avoid additional fees. In the end, just like any business, banks are only looking to gain extra profit from their consumers.
Payday loans aid many individuals by giving them a chance to climb out of debt and maybe even improve their credit. Maybe one day a suitable agreement can be reached by establishing a fair yet profitable Annual Percentage Rate. While it is true that APR fees may be a bit high, as you can see, it is better than the alternative. Most problems that develop around payday loans are due to inaccurate or insufficient information about how they work. Consumers need to make it their responsibility to understand the facts completely before making any decisions.
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