Payday Loans

Payday loans are essentially cash advances that are offered to people who are in need for some urgent cash to meet their emergency needs. Payday Loans have become increasingly popular over the last few years, despite the current state of the economy and despite controversies revolving around their “indecent” interest rates; they are still flourishing in the market. This is primarily because they have identified that there will be a constant need to supply credit to people, as there financial situation will always remain unpredictable, especially after the recession which has hit the rate of employment, mostly within the middle class, the need for an alternative source of income to satisfy their immediate needs has taken precedence over the real reason behind the origin of these services.

Payday loans were initially thought as a short term solution used by people with stable incomes to cover their emergency needs or cover expenses that may arise unprecedentedly, but it has slowly shifted from that to a more mass-scale phenomenon, where people are using these type of loans as an additional source of income, thus leading many into the dreaded cycle of debt.

There are several reasons why these payday loans can lead into a cycle of debt and let us discuss some of those reasons:

       High Interest Rates: Since these loans are short term, mostly ranging between 2 weeks to one month, to be repaid on your payday, these loans carry a high interest charge in the form of APR and are calculated annually. So in simple words, the amount of interest you would be paying on your loan in a year is bundled up into a 2 week long loan. For example- if you borrow 100 pounds, the average interest would amount to about 15 pounds which is high, as it can lead to people losing out on their repayment date just because of the additional interest.

    Roll-Over Option: This, most people don’t understand, is perhaps one of the most devious ways of making money. This option permits you to roll over your loan onto the next month, which means that your loan amount has gone up from 15 pounds to 30 pounds. In addition to that, there are penalty fees which are added to the already inflated interest which could land you in further trouble.

      Additional Loans: This is another way which could lead you into a lot of financial mess and sometimes even bankruptcy. A large number of people are not waiting to repay their previous loans and are taking out another loan, which piles up into a large sum. Once you realize that there is a huge sum that is accumulated, it becomes difficult to repay the previous debt and you indulge in further debt to clear the previous debt. In financial terms, this is referred to as a cycle of debt.

There are several articles that have been posted over the years relating the practice of payday lending to the great depression. It is a common fact that a majority of the payday lenders are catering to the working class people and the poor who probably don’t have the financial knowledge to understand the implications of such practices. The majority of the borrowers represent the age group of 25-44 years, more inclined towards women through the people using these services have been broadly classified into 5 main groups:

·         People without a 4 year college degree

·         Home Renters

·         African Americans

·         Those earning below 40,000 pounds annually

·         Those who are separated or divorced

The journal of economic perspectives have gathered data which propounds the fact that most of the payday loans borrowers are seriously debt burdened and they have been denied credit or not given as much credit in the last 5 years. This raises a finger directly at payday lenders. Although the goal of these payday lenders was to reach out to people who could afford these types of loans or people who could afford to repay the loans, they have not lived upto their promises. Their affordability checks are something that is written down on paper but not implemented at any level. This can be justified by information showing that a majority of the groups and communities that are borrowing from payday lenders are already in some sort of economic crisis and this is furthered by the unstable economic climate to which they are exposed to on a daily basis.

As if this situation could not be worse, where occasional borrowers are being slowly converted into chronic borrowers, research into this has found that there are certain lenders who have incentivized this process of conversion for their staff. They encourage their staff to convert the borrowers into chronic buying and are rewarded for their effort. In other words, these companies have a carefully planned agenda behind putting vulnerable populations into the cycle of poverty.

This problem cannot be dealt with independently without realizing that this is a much larger game plan with much larger institutions involved. Major banks like Bank of America, JP Morgan Chase realized the potential of this industry when it was valued at close to 9.3 billion in 2012 and have since then been investing heavily in this industry. These banks were known to finance almost 38% of the payday lending industry and even this number is considered to be on the lower side of estimates. Although the big banks have now bowed out of the industry after being warned by federal regulators who were checking on the extent of violations carried out by the support extended to these loans. However, this problem doesn’t end here as though the major banks are now left out of the race; there are middlemen that are operating on behalf of the companies which has posed another challenge for the regulatory bodies.

This could be called a more sophisticated means of stealing as there have been cases that have been reported of lending companies automatically crediting someone’s bank account and then wiping the account clean in the name of interest payment collection. This needs to be stopped at every level.