Payday Loan Industry has grown tremendously over the last fifteen years, and reports indicate that the industry’s annual loan volume is between $20 and $40 billion. It has been estimated that over twenty million Americans use Payday loans every month and with this increased usage, the Payday loans have come under the scrutiny of Consumer Financial Protection Bureau (CFPB). Hence, in order to know what changes the CFPB has mandated to streamline the Payday Loan Industry’s practices, and what new regulations are proving to be good news for consumers and legitimate lenders – read the latest whitepaper by FaaastCash.
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Payday Loan: Why It Is a Lifeline Today
1. Payday Loan: Why It Is a Lifeline Today
Introduction
The payday lending industry has grown exponentially over the last 15 years. Industry reports have no definite figures on how big the industry is. However, most reports indicate the industry’s annual loan volume is between $20 and $40 billion.
It is estimated that over 20 million Americans use payday loans every month. Generally, the costs of payday loans are higher than that of traditional credit institutions. However, payday loan borrowers prefer this form of credit for different reasons.
Over the past few years, the payday lending industry has come under increasing scrutiny by various regulatory bodies, and in particular the Consumer Financial Protection Bureau (CFPB). The CFPB is tasked with the mandate to promote fair, transparent and competitive markets. In 2013, the CFPB conducted preliminary studies on payday loans and deposit advance products to get initial data on the impact of the products among consumers and industry lending practices.
In the wake of the financial meltdown of the early 2000s and the collapse of the housing market, traditional credit unions and banks tightened their lending requirements. Many Americans that were affected by the financial crisis found themselves locked out of financing when they needed it most. This, and other complementing situations, led to the rise of the payday lending industry.
Initially, the payday lending industry mostly operated under little or no regulations. But the last few years have seen states coming with various rules to protect consumers and streamline the industry’s practices. Today, there is more regulation in the industry, which is good news for consumers and legitimate lenders.
Overview of Payday Loans
Payday loans are mainly offered by non-traditional lenders, i.e. non-depository institutions. The loans are advanced to help borrowers bridge unexpected financial gaps between receipts of benefits, paycheck or other sources of income.
Payday loans are structured in purpose like deposit advances. However, they differ in a number of ways.
Characteristics of Payday Loans
i) Availability. Borrowers can access payday loans within a short time with very limited underwriting. Most payday lenders advance loans between 1 and 24 hours. The lenders may be operating storefronts or may be based solely online.
ii) Size. The size of payday loans is significantly smaller than the amount advanced by credit unions and banks. Some payday lenders, especially those operating online, offer as low as $100 loans. On the other hand, most payday lenders operating storefronts offers loans from $500.
iii) Interest. Payday loan interest is charged based on the amount borrowed, usually per every $100. The interests charged vary from lender to lender. Also, some states regular the amount of interest that lenders can charge. Typically, interest rates lie between $10 and $15 per every $100.
iv) Term. The term of most loans extends between 14 and 30 days. In case borrowers are not able to pay their loans on time, they can request for an extension, allowing the loan to be rolled over their next paycheck. An extension is usually granted subject to the borrower paying a processing fee.
Benefits of Payday Loans
Most people prefer payday loans to traditional loans for various reasons. Generally, most borrowers opt for payday loans due to the following:
2. 1) Fast & Easy Approval. Payday loans are easy to get approved for, and are typically approved faster than credit from traditional lending institutions. Borrowers are not required to provide collateral for the loans. Apart from this, the lenders do not look at a borrower’s credit score to determine their eligibility for financing. Most lenders only require borrowers to be able to pay back the amount they are borrowing, and the funds are deposited in the account within a few hours.
2) Low Restrictions. Payday loan lenders do not have tight restrictions on borrowers that can access their financing. Most people with poor or negative credit score opt for payday loans since they cannot get approved for credit from traditional lenders. Most payday lenders require borrowers to be over 18 years, have valid identification documents and have held an active checking account for at least three to six months.
3) Easy Application. The application process for payday loans is simple. For instance, online lenders only require borrowers to fill a few fields on their online forms to get financing. In most cases, borrowers have to provide their names, residential address, phone number and email address to be eligible for a loan.
The easy application of payday loans is in stark contrast to the application requirements of traditional credit. With payday loans, the paperwork is significantly reduced and sometimes completely eliminated as is evident with online lenders.
Payday Loans Usage
Payday loans are given in smaller amounts compared to traditional loans. This makes them ideal for matters like avoiding paying a bill later or overdrawing a deposit. Payday lenders are not concerned with what borrowers are going to do with the funds.
Borrowers use the loans for different expenses including paying insurance premiums, buying grocery, paying for medical emergencies, among others. Some borrowers use the loans for their day to day expenditures while others use them for business expenses.
Payday Loan Pitfalls
The benefits of payday loans in providing accessible credit to Americans shunned by banks and traditional lenders, either due to having no credit history, being bankrupt or other financial situation, cannot be ignored.
However, there are a number of downsides that borrowers need to be aware of when dealing with payday lenders. These include:
a) Higher Charges
The interest on payday loans is usually charged per every $100 given. Most lenders charge between $10 and $15. However, there may be other fees that borrowers may have to pay for their loans to be processed.
Borrowers need to research the fees levied by the payday lenders they want to get financing from to know the exact amount they will end up paying. Most online lenders are transparent with their fees and outline them on their websites.
b) Unlicensed Lenders
Some states regulate the payday lending industry and have restrictions on the amount of loan that can be advanced to borrowers and interest that can be charged. Lenders who are not licensed may levy extra charges that may make a payday loan expensive for the borrower.
Borrowers need to carry out due diligence on the payday lenders they want to get financing from. The lenders should be in good standing with state financial regulatory bodies. Apart from this, lenders with storefronts must be licensed to carry out the business in the states they operate in.
Conclusion
Payday loans are a great form of credit for borrowers who, in one way or the other, may have been locked out of financing by traditional banks and credit unions. Applying for the loans is easy and the possibility of defaulting them is slim since their payments are channeled from the
borrower’s bank account.