Do you want to know the financial health of a community? You can use this tool to determine the financial health of a community. While abandoned houses and vacant shopping centers are a sign of trouble, a subtle indicator of economic insecurity is the presence of payday lenders in the region — businesses that cater to cash-strapped customers willing to pay high-interest rates for small personal loans.
Pew Charitable Trusts’ 2015 study found that 12 million Americans use payday loans every year, spending $7 billion each year on loan fees. Although the interest rates are often disguised as fees they actually range between 300%-500% annual percentage rate (APR).
It’s difficult to imagine anyone choosing this route if they compare the credit card APR of 15%-30% and personal loans from banks or credit unions at 10%-25%.
Pew says that the majority of payday loan customers are regular workers who earn at least $30,000 per year. Payday lenders target customers with low credit limits or who aren’t eligible for credit cards. People with credit cards have the ability to borrow money to meet short-term expenses, but those without credit are often left without options. Although they might be able to get a payday loan to pay rent or avoid being evicted, the high-interest rates often leave them in worse financial health.
What is a Payday loan?
Payday loans are short-term, unsecured cash advances that provide small amounts of money (typically less than $1,000). They have high-interest rates and require very little repayment. Borrowers may need to borrow $500 to cover basic expenses such as rent, utility bills, food, or medical bills. Although loans are usually linked to a borrower’s paycheck, lenders may issue loans when they feel certain that the borrower will be able to repay the loan in a reasonable time.
Payday loan companies in the United States typically operate out of low-income areas. Payday loan operators typically work from low-income neighborhoods and customers with poor credit. They also have little or no access to funds to pay urgent bills. Payday lenders have different ways of calculating interest rates. They often charge nearly 400% annually.
Although many assume that payday lenders charge high interest due to the fact they deal with high-risk clients, default rates are usually quite low. Payday loan interest rates are now regulated in many states, and many lenders have stopped lending to states that have them.
The Banks could be making small loans
The federal Office of the Comptroller of the Currency announced in the spring of 2018 that banks will be allowed to write loans less than $5,000 without being subject to the standard underwriting rules. This is to eliminate bank lending to those whose credit scores make it difficult to get conventional loans or credit cards.
These loans were called deposit advances and were usually repaid quickly by banks. New banking regulations ended this practice in 2014 after regulators pointed out that some deposit advances could lead to borrowers incurring crippling debt. Banks will be able to return to business with the 2018 revision, but it is possible that this won’t last long. The CFPB will impose strict regulations for loans that last less than 45 days.
In June 2018, however, the acting director of the bureau stated that he would like for this rule to be re-examined.
Who uses payday loans?
The Community Financial Services Association of America estimates that there are approximately 18,600 payday advance shops nationwide that have provided credit worth $38.5 billion to 19 million households.
Payday lending is attractive because of its simplicity and easy access to cash. This is especially true for consumers who don’t have access to credit cards.
Payday lenders are reliant on repeat customers, which are often low-income minorities. They charge exorbitant compounding interests for cash advances and are dependent on these customers. Payday lenders rarely offer borrowers repayment plans that work and are often not regulated in many states.
Payday lenders advertise via the mail, TV, radio, and online. They target working people who are struggling to make ends meet. Although the loans can be used for emergency situations, 7 out of 10 borrowers use them to pay regular, recurring expenses like rent and utilities.
Payday lenders offer cash advance loans and check-advance loans. They also offer check-advance loans. Payday lenders don’t check credit history, so they are easy to get loans. However, interest rates can be very high and customers are some of the least educated borrowers in the country.
In 2014, the Consumer Financial Protection Bureau (CFPB) released a report that revealed that payday loan borrowers renew their loans so often they end up paying more fees than they borrowed. Payday loan borrowers pay $520 on average for a loan that was original $375.
Despite all the consumer dangers, the U.S. payday lending industry thrives in states that don’t have interest rate caps. Dartmouth economist in 2008 stated that payday loan outlets were larger than McDonald’s and Starbucks combined. There are signs that the business is on the verge of collapse, as more states have set rate caps. According to a Pew study, the number of states in which payday loan lenders operate has dropped from 44 states in 2004 down to 36 in 2015.
Payday loan operations have been severely affected by the decline in operations. The Center for Financial Services, a nonprofit organization, reported a sharp decline in storefront loans that started in 2013. Revenue fell 23.4% between 2014 and 2015. The revenue for nonbank online payday loans also dropped by 22.5% during the same time period.
However, as payday loan revenue drops, issuers of subprime credit cards have made huge gains, keeping the level of all subprime consumer loans relatively stable in the past few years.
What is the Work of Payday Loans?
It can seem very simple to get a payday loan. Simply bring a pay slip, identification such as a driver’s license, and a checkbook. Many stores double as pawn shops. A clerk will usually offer $100 to $500 as a deposit that you must pay when you get paid. The clerk will ask you to pay $15 per $100 borrowed.
You will need to make a postdated cheque to cover the loan and fee. The lender will tell you that the check will be cashed after the loan period ends, which is usually two weeks. Sometimes, they may ask for authorization to electronically withdraw money directly from your bank account. Cash-strapped individuals quickly realize that they have no money left over and need to borrow more. They then return to the lender to request a repayment extension. These can quickly add up.
Although payday lenders are often located in physical stores, there is a newer type of loan provider that uses the internet. While some offer loans directly to customers, others act as information brokers who ask questions and then pass the information on to lenders. Online lenders are risky, according to financial experts. Although they might offer you a loan, it is not possible to know if they will use your personal information for any other purposes. This could open the door to fraudsters. Information brokers are websites that collect financial information and then sell it to lenders.
