Emergencies happen and by their nature happen quickly. When vehicles break down, or the air conditioner goes down where can people turn for help? Banking institutions in the United States along with the economy as a whole are not equipped to help the credit challenged or those in need of funds quickly.
Payday Lenders are in the business of providing short-term loans to employed individuals. The principal amount will be determined predominantly by the individual’s employment and wage. The borrower is expected to pay back the loan the next payday with interest or finance charge. States like Arkansas found a way to ban payday lenders. According to the Arkansas constitution, interest rates on loans are limited to 17 percent. The payday lenders claim it is not interest payments but a fee for services.
Individuals that receive a payday loan can pay anywhere from 10 dollars per 100 dollars borrowed up to 30 dollars per 100 dollars borrowed. If for whatever reason the individual cannot pay the principal on payday, or fails to authorized payment the lender then can charge the fee again and re-new the loan. The same terms will apply each time the loan renews. Loans automatically renew until the principal and all charges are paid in full.
Individuals receiving a payday loan will have those funds deposited in a checking account. The lender can also deduct payments from the borrower’s checking account. Many lenders have a clause where if the borrower closes their checking account they will be sued and or prosecuted. Once the borrower has received the loan, they are obligated to pay. They are not given the option of being a few days or even a few hours late before the funds are automatically deducted. Borrowers many times have found themselves in the rears in their checking accounts, because the payday lender had deducted the finance charge and principal.
There has been great debate over what many call predatory lending. At one point, the U. S. Government tried to shift some responsibility to banks to provide help for borrowers that use payday lenders. Banks under a voluntary program agreed to short-term loans up to 1,000 dollars. Banking institutions regardless of the loan amount or employment demanded credit checks and in most cases collateral for the loans. Individuals needing funds because of an emergency need those funds quickly. Banks and credit unions are not designed to process loans in that manner. The program no longer exists.
The theory is that if an individual does not have the extra cash today for an emergency then it is unlikely they can afford to pay it back on payday. So where does that leave the borrower? They need funds today. They borrow and then end up in a cycle where the loan is renewed along with the charges. Some claim that the borrowers have borrowed simply because they can. Experts advocate economic counseling prior to anyone receiving a payday loan. Borrowers cannot add days to emergencies sick children, or vehicle breakdowns require immediate attention. When an individual’s paycheck is the same every two weeks it is hard to see where the funds will come from to pay back a loan.
Payday lenders require an individual to be employed. The amount of the loan can range from 100 dollars up to 2,500.00 dollars. Borrowers have gotten themselves into serious financial trouble in some cases by allowing the lender access to their checking account. Lenders have the authority to deduct any valid amount owed along with charges.
The payday lenders call the charges service fees or finance charges. If averaged out over a year’s time, the fee or charges can range from 400 to 600 percent. One of the main reasons payday lenders are tolerated is because it is not over a year’s time but a matter of weeks. Many officials want to shut down payday lenders, but consumer demand is high.
Payday lenders on average receive over 4.5 billion dollars yearly on just fees alone. Obviously, the dollar amount loaned is substantially higher close to 28 billion. Many borrowers end up paying as much in fees as the amount borrowed. Unless states make payday lenders illegal in their states and consumers stop borrowing payday lenders have a place.