Whether the payday lending firms are profiting immensely at the expense of the consumer or not, there are many aspects that needs to be debated about these loan facilities. First, the consumer who is being served by these lenders is underserved by traditional banks. This is a consumer who cannot obtain loans from traditional banking institutions. The consumer has perhaps exhausted all funding options available and the only choice left is the payday.
One aspect about these payday loans is that they are highly priced and for sure, the consumer knows about this factor. Because of the financial challenges which many have experienced during and after the recession, they are still healing from the financial scars and it may take a couple of years to recover. The poor credit score suffered during the recession may affect the consumer for several years.
These consumers need money and if they cannot get it from the traditional lending institutions, they opt for payday loans. On the other hand, payday lending institutions understand the risk they subject their businesses into when they engage in payday lending. Because the borrowers are financially unstable, they are likely to face challenges which may lead to defaults in repaying the amount.
However, there is a very big need for payday short term lending. It may be argued that the reason for the exorbitant rates charged by lenders has nothing to do with inability for the investment to be profitable when following the law. These companies reap high profits simply because they can and there is no competition that can allow the rates to go down.
Payday Lending Institutions
These firms are targeting people who are in desperate need for cash meaning that they would meet any cost of the loan in order to get that essential cash for their survival. When the lender grants the borrower a payday loan and it is rolled over three times, the lender has already profited substantial amount from the loan. Because of the financial challenges of the borrower, it is not uncommon for the loans to be rolled over meaning that they shift from short term to medium term or long term loans and this is why the margin of exorbitant rates for the loans comes clear.
A 10% or 15 % rate for $100 for a period of two weeks may not seem a big amount but if the unexpected happens. and you are not able to pay that amount, this is when you discover how costly these loans are. In a year, you can pay up 400% in APR and this is very expensive compared to average lending APR of about 25% by traditional banks.
If payday lending firms are reaping big profits at the expense of the consumers, then what would happen to the underserved consumer if these lending institutions are scrapped off? It means that the consumer will continue to be segregated and this could cause more troubles in persons who cannot access traditional personal loans from banks.
If traditional companies are able to venture into the payday lending market, they can be able to easily undercut the high rates of the loans thus making them realistic and easily payable. However, how many traditional banks are willing to venture into this risky lending market?