The truth behind payday loans

November 8, 2006 - Beverly Hills, California

There is a lot being said about payday loans. Many claim that the interest rates charged are outrageous. Others say that they are the only source of finance available for those with less than perfect credit score. There is a bit of truth in both claims but there is much more to payday loans than meets the eyes.

A Simple Concept

When Pay Day Loans first appeared in the finance industry, they came to fill a gap not covered by any other financial product. The original idea which remains in most of the loan products of this kind is to provide a small amount of money, usually up to half of the borrower's wage for a short term (till pay day) at the end of which the money is reimbursed plus a fee or an amount of interests.

This was a simple and speedy way to solve a temporary lack of funds. Personal loans took to much time to be approved because there were too many credit examinations to be done. The whole concept was extremely simple: A small amount, a short term, fast approval.

How do lenders get a return on such small amounts? Even simpler, the interest rate charged is considerably higher. The high return in terms of percentages also came to justify the high risk involved in these transactions for the lender. Since there are no credit checks whatsoever and the loan is unsecured, there is absolutely no guarantee that the borrower is going to return the money (other than his salary).

The Actual Situation

Problems began when the proliferation of this kind of loan drew so many unscrupulous lenders to this new market. In order to attract new customers they began to offer longer repayment programs, loan renovations, interest reschedules, etc. As with credit cards the flexibility offered by pay day loan lenders began to create a vicious circle for many people that had no control over their finances. Thus, they take a pay day loan, fail to repay it on time and take another one in order to pay the previous one and so on. Debt starts accumulating, interests increase and sooner or later a debt consolidation program is necessary or worst, they have to file for bankruptcy.

It's as unfair to say that the whole responsibility belongs to the lenders as it is to say they have no responsibility at all. The advertisements, the hidden loan terms concealed in the fine print of loan contracts too long for anyone in a desperate situation to read and the easiness with which some lenders extend loans for people they know can't repay without making huge sacrifices has a lot to do with the bad reputation of Pay Day Loans.

Applying for a Pay Day Loan is not a sin

If an unexpected situation arises and you don't have the money you need to solve it, nor you have the time to resort to other forms of finance and you know that you'll be able to repay the loan without problems by next payday, it won't kill you to request a payday loan. What you need to understand is that they are meant for emergency situations and you must avoid taking it as a habit to request a payday loan every time you need extra cash for whatever reason.

News Source

American Chronicle, Sarah Dinkins, Staff Writer

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