Payday loans are a short-term borrow where the lender will give a person a high-interest loan based on the borrower’s income and credit. The loans are borrowed against the lienee’s paycheck. Also known as a cash advance or check advance loans. The loans are considered predatory by some lawmakers, as they have extremely high-interest rates and have hidden provisions that charge additional fees.
Emergency payday loans, as we know them, were created in 1994 by Allan Jones in Cleveland, Tennessee, made possible by the lobbying efforts of Jones. Check Into Cash was the first check advance store in the U.S. Over the years, the industry has grown from 500 stores to over 22,000, with a market of $46 billion. The payday loan industry has more stores than Starbucks and McDonald’s.
To obtain a payday loan, one must complete an application, provide pay stubs showing their current level of income, and maybe credit score. Lenders often base their loans on wages earned. Additional factors may include a borrower’s credit history and score. Although some lenders do not require any of this, and some have their criteria. Payday lenders are typically small credit merchants with physical stores, but some are available now online.
Borrowers of these types of loans have been charged extremely high interest. These rates can be as high as 500% APR. Most states have a cap on rates at 35%. However, many payday loan lenders fall under exceptions. Borrower beware, because most states regulate this industry individually, with 25 and Washington D.C. outright outlawing such practices. California, for example, has a law that states a lender can charge a 14-day APR of 459% for a $100 loan!
The federal Truth in Lending Act required the lender to disclose their charges, although most borrowers do not read the disclosures. Most loans of this type of for less than 30 days and help borrowers meet short-term burdens. These loans range from $100 to $1,500. Many of these borrowers repeat this process and rollover their loans incurring additional charges. These types of loans are usually not the best types of loans to indebt yourselves with.
According to the United States Securities and Exchange Commission, these loans do NOT carry more long-term risk to the lender than other forms of credit. According to Pew, white females between the ages of 25-44 years old are the most significant users. When controlled for other factors, five groups are at higher odds of using payday loan services: those without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced. Users are indebted for an average of 5 months.
In all, payday loans are for extreme emergencies only. It would work out better for borrowers to instead apply for a personal loan. Personal loan terms are better, longer, and cost less. For example, a $500 loan from a payday lender would be required to be repaid in two weeks for $575 — a total of $75 in interest. A personal loan would require 12 months at 14.99% and would cost $45 a month and have interest total only $42. There are pros and cons to each, but, personal loans are far better values.