Payday Loans Target The Poor

People have been taking out what we call payday loans since time began. Many times it was called an advance that you would get from an employer. On the seedy side it may have been a visit to the local loan shark. Then there was always the pawn shop where you could hock your watch for a temporary loan. Today and entire industry has grown up dealing only with payday loans.

Paycheck loans are unsecured, short term, and typically are not greater than $1500 and usually much less. The payday loan is designed to tide a person over when their money runs out before their paycheck arrives. Consequently these loans are for 7 to 14 days.

Everyone has found themselves in the position of running short on cash. People with good credit fill the shortage by using their credit card. People with no credit or bad credit use payday loans. On the surface this looks like a legitimate service that provides a source of credit to a population that would otherwise be without credit. Why would anyone think that this service is a rip off?

Consumer advocate groups contend that the payday loan industry is charging interest rates that are far in excess to what they need and that they are targeting poor people. Interest rates as high as 700% APR are not uncommon. Each state sets the rules for the industry and consequently the interest rates and other terms vary state to state. So a person with no credit or bad credit is charges 700% where a person with good credit would be charged 14% on their credit card.

Payday loan companies do target poor areas. In fact over 80% of their stores are located in areas designated as distressed or poor. Banks on the other hand, stay away from those areas with only 34% of their total facilities serving poor areas. When you are the only game in town, as the payday loan people are, you can pretty much charge what the market will bear.

The service they provide, small, short term loans is also a product that conventional banks have no interest in. The only thing required to be approved for a payday loan is a verification of identification, proof of income, and a checking account. No credit check is performed so there is no inquiry on the borrowers credit report. Loans are processed typically in a single day and the funds are wired or ACH to the borrowers checking account.

It would not be surprising to discover some banks planning to enter this lucrative market at some point in time. Today however, they do not serve this market in any significant way. Payday loan customers actually see the loans as their safety net. When the $100 utility bill is due four days before you get paid, where else can you go to get the cash to cover it. The $30 that the $100 loan will cost is just the cost of doing business. Paycheck loan customers do not view these loans as an ongoing resource but rather a one time expense.

Payday loans have found a new market thanks to the high unemployment and housing disater. Persons formerly holding “good credit” ratings are now finding themselves with bad credit ratings and being locked out of conventional credit access. The loan companies have all jumped on the internet where this “new” market lives. Online loans are identical to the shop loans but are much more convenient.

If you find yourself contemplating using a payday loan service, make sure the company is licensed to do business in your state. Also make sure you understand the interest rate and the consequences of not paying off the loan on time.