Controversial Payday Loans

No one would opt for a payday loan unless it was an absolute need. It's a very high interest rate loan. Is it worth the cost? Many of the articles here, can help you answer that for your specific situation. There is some controversy related to payday loans and the high fees associated with them.

As a form of subprime lending, such as high interest rate credit cards, payday lending is the subject of controversy. Some critics claim that payday lenders target the young and the poor, near military bases and in low-income communities, who may not understand the time value of money. Others go further, comparing payday lenders to loan sharks due to high interest rates — typically 250% or more when annualized. There have been reported cases in which payday lenders have pursued criminal bad check charges, despite the fact that they (presumably) knew the check was bad at the time when it was written. Likewise, it is argued that the interest rates on payday lending (and on rent to own) unfairly disadvantage the poor, compared to the middle class who pay at most 25% or so on their credit cards.

Defenders of the higher interest rates note that payday loan processing costs do not differ much from their higher-principal, longer-term counterparts such as home mortgages. They argue that conventional interest rates at these lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest, which would fail to match loan processing costs.

A study by the FDIC Center for Financial Research found that “operating costs lie in the range of advance fees” [collected] and that, after subtracting fixed operating costs and “unusually high rate of default losses,” payday loans “may not necessarily yield extraordinary profits.” Based on the annual reports of publicly traded payday loan companies, loan losses can average 15% or more of loan revenue. Underwriters of payday loans must also deal with people presenting fraudulent checks as security or making stop payments.

Payday loan makers also argue that the interest on a payday loan is less than the costs associated with bounced checks or late credit card payments. For example, bouncing a $100 check may inccur an NSF fee from the bank of $28 and a returned check fee of $25 from the merchant.

In comparison, when expressed as APRs for two-week terms:

  • $100 pawn loan with 20% service fee= 240% APR
  • $100 payday advance with $15 fee= 391% APR
  • $100 bounced check with $48 NSF/merchant fees = 1,251% APR
  • $100 credit card balance with $26 late fee = 678% APR
  • $100 utility bill with $50 late/reconnect fees = 1,304% APR. (Wikipedia)

So as you can see there is quite an expense associated with many of your potential options. Make sure to to thorough research and make the best choice for you and your family.

Most Popular Articles:

When you are in a bind and have a financial emergency a payday loan can be a real help in these situations. However, you should be extremely careful when taking out any type of payday loans as the fees that you will be charge can become extremely large. The whole purpose of a payday loan is to
Read more . . .

Applying for a payday loan online is a quick and effective alternative compared to actually driving to a payday advance store. There are several reasons why applying online is in your best interest. When you apply online you save the time and the trouble of applying in person, you can find better rates than you may receive
Read more . . .

Need emergency cash? Applying for a quick payday loan online will provide you with the necessary funds to handle a crisis. Getting quick cash has never been easier. Moreover, online cash advance companies offer privacy and convenience. There are several advantages to getting a quick personal loan. Here are a few tips to help you understand how cash advance loans work. Why Get
Read more . . .