Up until about five years ago, you could find a payday loan establishment on every street corner. These quick fix alternatives help those who are caught in a financial pinch in-between paychecks. The concept is novel, but the problem is that most people get one loan to pay back another. Soon, they have several loans floating at once, and they get in over their heads. Experts say that nothing good comes from payday loans.
Taking Out Loans People Can't Afford
Recently, the PEW did some research on payday loan borrowers. They found that the average loan was $400, and they are typically paid back in two weeks or at the next pay cycle. Some places are a bit more generous with repayment times. What they found was interesting. The average person will owe $400 to the lender, but they can only afford to pay back around $50. So, they must keep getting loans until they can afford to pay off the entire balance. Surprisingly, only 14 percent of borrowers will have the ability to repay the loan with ease.
Why do People Use Payday Loans?
These loans are a last resort for many people. Most who get these loans have either fallen on hard times or they are lured by the hype of misleading statements. Those who experience a vehicle breakdown, need drugs or are in some sort of danger find these as attractive options. Most see the misleading marketing tactics and have no clue what they are really signing up for. Advertisements like "only pay $20 per $100 borrowed," can be misleading. What they don't say is that the APR is often over 500 percent. The APR on most payday loans is over 400 percent. Those who are in a good frame of mind would never be deceived by these advertising gimmicks.
Why The Law Is Cracking Down On Payday Loans?
There is a strong lobby that has helped the $7.4 billion per year industry. Those who have poor credit or are experiencing unexpected cash shortages need options when it comes to financial crunches. Some see it as a tool that can be used in emergency situations, while others view it as crazy options like using a chainsaw to cut bread.
The problem is that taxpayers are helping to pay the bills for those who fall on hard times. Many of the payday loans frequents are on government assistance. Because of the controversy surrounding these loans, 13 states have either made them entirely illegal or put rate caps on the loans. Many officials think that payday lending should be banned nationwide. The number of brick and mortar institutions has dwindled, but there is still a plethora of lending sites online. Many feel there is a moral imperative to protect those who are the most susceptible to predatory business practices?
However, not everyone is for banning payday loans. In an ideal world, education would help people to rethink their poor financial decisions. Honestly, no amount of education is going to make everyone fiscally responsible. People cannot ignore the fact that these institutions prey on the financially vulnerable. The problem is that people are not using these loans for emergencies, but they are also using them for instant gratification. Some legal experts say that it is the behaviors and thought process that needs to change. The lenders are just conduits for poor choices. But, just as the payday lenders have reduced their presence in many states, other types of alternative lending have appeared. Title loans are the new revolution of payday-style lending. It is essentially the same product, only it has a different appearance.
Payday Lenders Cannot Be Blamed For Poor Budgeting
Still, many are arguing that the government cannot regulate everything. There is a need for people to get emergency cash without being taken advantage of in the process. What if a person didn't have family or friends to borrow cash from? Those with poor credit have just a few options. What if the banks had incentives from the government to offer loans to low-income people? Experts disagree and feel that banning or putting all sorts of rules and regulations on these lenders is the best option. More states are joining in the witch hunt and trying to stop these predatory lenders. Unfortunately, there is always a loophole and other similar scheme will replace the old. Perhaps, teaching financial management principles to those who have poor budgeting is a better option.