The Concept of Payday Loan
Payday loans have become popular both due to the high demand and also due to the various advertising companies in mass media and Internet. These loans are also known under the names of cash advance loans and gained such popularity not without a reason. They are intended as instant financial help for people in the situation of emergency and are available to all borrowers.
In the present day America about 70% of families live from paycheck to paycheck. A lot of people get such small salary that it is frequently not enough to make ends meet. It becomes a real problem when some unexpected expenses come on the way. This is quite understandable that friends can help; however, more and more people tend to choose payday loans against all the other options; and first of all for their convenience.
It is normal that where there’s demand, there’s supply. In the financial sector this business branch is sufficiently enough presented. With the advent of Internet the infrastructure has spread even wider.
Payday loans are small short-term unsecured loans that are supposed to be repaid on the next person’s payday. Such loans are either given against a personal post-dated check that is cashed by a lender on a payday; or they are repaid by means of electronic money transfer when a lender withdraws repayment from a borrower’s bank account on due payday. The term of an average payday loan is 2-4 weeks.
In accordance with the CFPB 2013 report “It appears these products may work for some consumers for whom an expense needs to be deferred for a short period of time. The key for the product to work as structured, however, is a sufficient cash flow which can be used to retire the debt within a short period of time.”
In accordance with the Pew Charitable Trusts 2015 report based on a survey payday loans have the following features.
- These are small cash loans offered for a short term with APR 300-500% on average that are supposed to be repaid in two-week period.
- The number of Americans that use payday loans annually is about 12 million with an average fee of $520 for a $375 loan.
- 69% used payday loans to cover recurring expenses.
- 16% use such loans for cases of an unexpected expense.
- The survey showed that 75% of borrowers feel that this credit sector is insufficiently regulated.
- General public supports CFPB efforts for better regulation of the industry. (CFPB framework proposal)
- Certain percent of the respondents are inclined to accept the alternative small cash opportunity provided by banks despite the fact that they are likely to be more expensive than usual credit card offers and similar products.
Certain percent of the respondents are inclined to accept the alternative small cash opportunity provided by banks despite the fact that they are likely to be more expensive than usual credit card offers and similar products.
n accordance with the Online Lenders Alliance 2015 report the following payday loan characteristics can be indicated:
- Average median loan amount is $428
- Average median loan cost is $113
- Average median loan term is 20 days
- Average median annual days indebted are 73 days
The report also states that “The demand for small dollar, short-term credit remains significant with a modest reduction of 8 percent from $49 billion in 2012 to $45 billion in 2014.”
Post-dated checks are signed for the total sum of the loan and the fee; in case of electronic transactions lenders simply withdraw the total sum from a person’s account. A borrower is supposed to repay in due time, which is generally the next payday. In case of necessity, the loan can be rolled to another pay period with all the finance charges included.
Payday loans are small loans ranging from $100 to $1,000 on average. The maximum amount of a loan depends on the state and also on the income of a borrower. Such loans are very expensive in terms of interest rates and, this is, perhaps, their distinctive feature.
As long as they are unsecured and frequently can go without credit checks, lending companies charge a lot for the convenience and anonymity. Thus, a usual interest rate ranges from $10 to $20 depending on a lender and a state; which amounts to 391% APR for a 14-day loan. The shorter the term of a payday loan, the more expensive it is in terms of interest.
Payday loans are very popular in the first place for their convenience and easiness of obtaining procedure. In order to qualify for a payday loan a person has to meet the few requirements that are pretty simple.
- A borrower must be at least 18 years old,
- a U.S. citizen,
- have got an income source
- and a valid bank account (preferably checking).
The application process takes minutes and it is almost 100% approval service. As it has been aforementioned, payday lenders do not perform any credit checks.
Payday loans in the U.S. are a subject to state laws regulations. According to the federal Truth in Lending Act all payday lending companies are obliged to disclose loan costs and provide the full and clear information about all the financial charges referring to a loan. This refers to interest rates and APR; the latter should be provided in dollar amount and before the actual agreement is signed by a lender and a borrower.