As the American public emerge from the economic recession, they have become more finance aware. This means that borrowers have a better idea of what they are getting into and make educated decisions. A survey conducted by Pew suggests that majority of the public knew how to manage their finances and also what source of money should they turn to in order to meet their shortcomings. However, a U.S. based financial analyst has described the current economic environment in the country as stable but indebted. This means that although most people have attained economic stability in the wake of the recession, not everyone has full recovered from its effects.
According to the U.S. Census Bureau in 2015 most of American citizens had unsecured debt. Quite a few of these borrowers had had to default at one point or another during the economic downturn. This left them with bruised and bad credit profiles making it much harder to acquire reasonable loans from banks and other lenders.
This is where Payday lenders have succeeded in bringing much needed cash to borrowers. By the middle of 2016 about 5.5 per cent of adults in America have had to use a loan from a Payday lender. This type of lending is meant for a short term period to pull one over till they can manage to secure their finances. The usual time frame for such loans are anywhere from two to six months. And according to a market study, majority of user would recommend a Payday loan company to their family or friends.
As this type of lending is not secured against any asset of the borrower, the risk for the business is generally high. While a minority of Payday loan users default on their payments, this has caused the industry of such short- term loans to keep their interest rate comparatively high. This has led to some prospective borrowers to eye this type of lending with distrust. Some points that are the most common to play across the first time Payday borrower’s minds have been clarified here.
High Interest Rates:
This is the most common, yet widely misunderstood issue picked up by the critics of Payday lenders. These loans are designed to help borrowers manage their expense for a short period of time, usually anywhere from a week to a few months. It is not meant as a long- term loan solution. The default rate of about 30% of borrowers from Payday loan companies are the reason it is very risky for the business to hand out loans, therefore they keep their interest rates at a higher level than long- term loans from banks or other finance sources.
The interest rate shown by Payday lender also represents the annual percentage, and as these loans are meant to be re- payed after a much shorter period, the amounting interest is a small portion of the original loan. A leading British Payday loan company has explained this by providing an example that a borrower taking out a loan of £100 over a period of one month would have to pay back £120 by the end of it. This would include the amount borrowed as well as the interest.
An online Payday lender has advised its customers that before taking out a Payday loan it is important to keep the end of the contract in perspective. If there is not any stable income coming in, it would be a risk to take out a loan without knowing if the borrower would able to make all the repayments or not. This could result in the loan being rolled over with additional charges, making it even harder for the borrower to pay it back. In the U.K. the amount that has to be given back to a Payday lender cannot exceed 100% of its original loan value. This has provided some users a safety net if they repeatedly fail to make the payments.
Prior to handing out the loan, the lender usually makes an assessment based on the probability of the customer making all their payments. This is usually done on the spot by analytical software and the judgement of a trained lending broker.
Actual Benefits of Using a Payday Lender:
The cost to benefit ratio of a loan taken out from a Payday lender would wholly depend upon the borrower. According to data collected by Pew, 81% of borrowers said they would have significant difficulty in managing their finances without a Payday loan. Nearly 16% of borrowers had taken out a loan to pay for emergencies and would have not been able to afford the expenses without the speed of a Payday loan.
However, the most significant benefactors of a Payday loan would be the people who have a bad credit score, most probably from scrapping out of the recession.