Payday loans are surprisingly rooted in sound accounting and financing principles
Payday loans are usually sought after by consumers who are in need of a quick source of income. These consumers are not necessarily classified as impoverished; in fact, they may hold regular, full-time jobs. For various reasons, however, these consumers have not been able to attain financial stability, probably living paycheck-to-paycheck. Unlike those who are financially better off, calling upon savings and reserves, payday loan consumers may not have any recourse in a financial emergency.
Payday loans come to the rescue of consumers by providing a quick, easy-to-come-by source of capital. These consumers lack any valuable assets in which they can put up for collateral to borrow money — which has been a custom for many decades, if not centuries. Payday loan stores incur a lot of risk by making these loans and must account for potential defaults by the individual borrower and across the larger pool of borrowers. This is similar to how some healthcare plans across the world charge higher premiums for at-risk people with preexisting conditions.
Payday loan interest rates can reach the double-digits pushing past the 20% mark. This is how the industry accounts for the extreme risk in lending to consumers with no collateral. Some equate this rate to “loan sharking”, decrying payday lenders are no better than the mafia. Mega banking houses, on the other hand, have offered lower rates to consumers over the years, in a lot of cases less than 10%; that was coupled with relaxed qualification standards for those who were less than creditworthy. Consider this: it wasn’t high interest rate payday loans which brought the economy to its knees during the Great Recession. The real culprit was the supposedly solvent, fiscally responsible banking institutions which neglected fundamental and proven rules of financing low and high risk customers.
Payday loans and the practices by the stores which issue them may be a small part of the answer to the world’s economic woes. The exorbitant fees and penalties incurred from taking out a payday loan, not paying it off in a timely manner, or worse, not repaying it back at all, is a good motivator for consumers to change their financial portfolio. For example, consumers may reel in their expenses or seek more education for better employment. After all, if the recent economic troubles have taught consumers anything, it’s that the onus falls back on them regarding financial well-being. There’s no guarantee those charged with ensuring the solvency of the financial system will always be responsible.
ADDITIONAL REFERENCES:
1) http://www.paydayloanadvances.co.uk/Regulatory_Bodies.asp
2) http://online.wsj.com/article/SB10001424052702304370304575151214152476000.html
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