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.
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.