How Payday Loans Help the Average American

Online payday lenders have recently become the target of various consumer advocates, state regulators, and the Justice Department in general. While the efforts of the government to weed out malevolent actors in the finance sector is plausible, it might have some consequences which may be unintended. One of these consequences involves snatching away a service that is extremely helpful to the underbanked American who needs short-term loans to get by — short-term loans like the payday loan.

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How Do You Find a Payday Loan

Payday lending works in a very simple way. You have an emergency need for cash, you search on the internet for “payday loans near me” and find a payday lender. All you need to qualify is a job, an active checking account and the right identification, and you can typically borrow up to $500 and pay it back as soon as your salary comes in. All you have to do is provide an authorization to the lender to retrieve the amount of the loan plus interest of about 15 percent or a postdated check for the same. As soon as your salary rolls in, you can either pay the loan back in person, or the lender can cash the check. Your first time taking the loan will be fast and simple, typically taking no more than 15 minutes.

This is an invaluable service for millions of Americans, who live from one paycheck to the next. They have to manage their finances and meet their obligations, just like their higher-earning counterparts. However, when the unexpected comes knowing on the door, their finances are thrown into disarray, and they will typically need some kind of short-term loan to help them get by.

For some of them, this loan can come from their friends and family. However, most of them don’t have such a last resort, and that’s where payday lenders step in.

Interest Rates Can Be Problematic

Many critics of the system will cite the high-interest rates charged by payday lenders. For example, 15 percent interest over a period of two weeks is equivalent to nearly 400 percent interest when annualized. However, this would be the case if it took an entire year to pay back the loan. The typical payday loan has a term of just two weeks. Moreover, the interest charged on a payday loan that lasts an entire year is still much less than what you would pay if you were late with your credit card payment or mortgage payment or end up with a bounced check. We haven’t even begun to talk about the lost income that comes from a broken-down car that you never repaired or the job you lost as a result.

The best payday lenders out there will fully disclose the terms and conditions of their loans and mention the annual percentage rate and the fees in dollar amounts. These lenders are also highly regulated by the Consumer Financial Protection Bureau and state agencies. The compliant ones are pleasant to work with and have the interest of borrowers in mind when they provide their loans. While there are undoubtedly a few bad eggs, it simply wouldn’t do to throw away the whole tray.

Author: Bruno Souza

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