It has been a widely discussed subject and yet there still seems to be some confusion as to just exactly what payday loans actually cost. There have been many valid arguments on both sides of the issue but what argument is the most valid? Are payday loans as bad as some people claim? Do payday loans prey on the poor? I will attempt to answer some of these concerns in this brief article.
I have seen many venues that claim payday loans are the same as lone sharking and the interest rates are exuberant. A quick glance at the interest rates will surely raise eyebrows! The APR’s seem to be very high and perhaps over priced. However, with a little bit closer look, it is not right to use APR for these short term loans that are designed to be repaid in usually two weeks. For example, on payday loan site show an APR of 320%. WOW, sounds awful, but you are basing a two week loan on a yearly interest rate! Now take the same rate and compare it to a bank overdraft charge… the overdraft charge can be broken down to an interest rate of more than 1000%. Clearly the fee charged by a payday loan is not as awful as an actual bank overdraft fee!
Then there is the issue of payday loans companies preying on the poor. This could not be further from the truth! The average payday loan customer earns from $40K to $60K per year. This is far from people at poverty level. These are people who make enough money to be able to repay the loan or the loan company would not even consider them for the loan! There may be some truth to the fact that payday loan companies prefer for the borrowers to extend their loans. It actually makes good business sense to make as much as possible, but this is also a practice propagated by banks!
I believe that banks are being negligent by not offering similar services instead of charging outrageous overdraft fees! There is no doubt that banks make a lot of money through these fees and with the economy in it’s current condition, the banks are only trying to collect more of these charges.
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