Payday Loans from your Phone?

Leave it to the USA to come up with this one.

Apparently, there is a new service in the USA where you can actually apply for, and get approved for, a payday loan right from your phone. That’s right. A payday loan. From. Your. Phone.

The lender, Extloans, has published an iPhone application that will let users take out a loan of hundreds of dollars at a time. Run the app, make the application and within an hour or two you can have money direct deposited into your bank account.

This opens up the imagination to all sorts of scenarios. You’re in an electronics store and you’re shopping for a stereo. You know you’ve only got $400 in your bank account, but you see a stereo that’s $800. You pull out the iPhone, take out the payday loan, and within a couple of hours, you’ve got your loan and your stereo.

One of the downsides to this sort of arrangement, however, is the danger of impaired borrowing. Perhaps you’re out on the town for a night, and have had one too many. No payday lender would give you a loan if you walk in stinking of beer and stale cigarettes. Your iPhone, however, doesn’t know the difference.

Of course, as with everything, there are fees involved.

The fees on these loans, however, aren’t your typical 20% that you might find with a credit card. They’re not even the 300% you might find with a typical payday loan.

The average APR for a loan from Extloans is 2,589%. And, no, that wasn’t a typo. That’s a comma. Two THOUSAND, five hundred and eighty-nine percent.

So, before you jet across the pond to London just so you can use Extloans from your iPhone, thank your lucky stars you live in America. Yes, we have predatory lending. Yes, we have outrageous interest rates for payday loans.

Payday Loans Boom During Bust Economy

No matter where you look, whether it’s on Michigan Avenue in Chicago or High Street in Cardiff, you can hardly go for more than a mile without finding a payday loan business, or at least an advertisement for one. Payday lenders about, fighting one another for a coveted and small, yet growing, marketplace.

Payday loans provide a relatively small amount of cash to a borrower with the idea that, on their next payday, they’ll pay back the loan. Unfortunately, in a down economy, more and more people find themselves in need of this kind of a service.

The Wrong Kind of Opportunities

In many ways, the success story of the payday loan industry is the same story as the credit crunch and the recession. The global crisis in banking slowed credit to a crawl. Funding for lenders and for banks dried up, and consumers found themselves without access to cash. Because of that, the number of payday lenders has risen sharply.

Payday lenders rely on quick returns for short term loans of small amounts. In some cases, existing lenders are adding payday loan services, while in other situations related businesses like pawn shops are entering into the fray.

In addition, payday loans are now available online. Many lenders offer online payday loans. Of course, whether or not you can actually use one of these online services actually depends on the specific lending laws in your home state.

A Matter of APR

The controversy surrounding payday loans has to do with the associated fees. In California, for example, you can borrow $100 with a maximum fee of $15 for the loan. When that’s paid off in two weeks, you’re all done. If you don’t pay it off and have to renew, you pay another $15. Over the course of a year, this adds up to an Annual Percentage Rate (APR) in the hundreds of percents.

Advocates of payday loans argue that APR is irrelevant. That’s true, if the loan is paid off. More than half of payday loans, however, are renewed for at least one more pay period. That’s when consumers can find themselves stuck in a vicious cycle of fees.

Real Solutions

Some politicians have argued that the best way to fix the payday loan problem is with regulations. In fact, several states have capped APR rates for loans. Still, the best way to put payday loan businesses out of commission is to get the economy going again, putting people back to work and into a position where they no longer need payday loans.

No Banks for the Poor

Economic times are tough, and people all across the economic spectrum are finding themselves facing new difficulties. More than one million households in the United States lost access to basic banking needs in the last year, according to a recent report by bank regulators. This number adds to the already 30 million households in the U.S. that already don’t have access to banking services, or who have little access.

Those figures represent the number of households that don’t have bank accounts altogether, or that regularly use other services as an alternative to banks. Some of the services include payday loans and check cashing services. All told, more than 25 percent of households are affected by this phenomenon. Among the hardest hit households are those who are poor, members of a minority, or immigrant families.

Access to a basic bank account is an important component of financial stability and security. A bank account lets a financially vulnerable family be able to save up for emergencies, as well as take out loans on terms that they can afford.

Unbanked and Underbanked

The FDIC classifies these households into two different groups. The first group is known as “unbanked.” Unbanked households are households that don’t have a checking or a savings account for anyone living in the house.

Underbanked households are a step up, but not too far. Underbanked households are those that may have a bank account but that regularly use more expensive forms of credit, such as check cashing services, pawn shops or payday loans.

While underbanked families are in a little bit better position than unbanked ones, there is concern that these families, too, are relying on those more expensive forms of credit. Accordingly, there is a move at the FDIC to encourage banks to open up their services to these kinds of customers.

How Income Factors In

Native American, Hispanic and black families are more likely than whites to fall into one of these two categories. In addition, approximately 71 percent of unbanked households bring in a total of under $30,000 per year. This is a staggering figure, and demonstrates that there are just too few services in the traditional banking area that are available to poorer households.

Payday loans are a viable option for these folks. Payday loans provide instant access to funds for basic need