We might think that
this is a good direction. After all, being careful is not wrong. Well, it is
not that simple. The fact that banks and traditional credit institutions don't
approve credits with ease anymore allowed the short-term lenders to develop.
Since the invention of capitalism, one of the basic laws of borrowing applied:
shorter loans have bigger interests. In the case of payday loans or loans on a
few months, the interests are huge, at least in the opinion of some. As the
average American does not have another option to get money for daily expenses,
the short-term loans with huge interests remain the only viable solutions.
Are the interests of
short-term loans so high?
The average APR of a
fast loan is 350%. This means that you will have to pay 3500$ per year if you
borrow 1000$ through a payday loan for one year. This is a rough estimation,
and when a person thinks about a payday loan, he or she must not think about it
in terms of APR. You can't take a fast loan for a year, so why would you think
about how much money you need to pay in twelve months? When a person thinks
about a payday loan, he or she must think about what debts could be covered
with that money. If the loan is opportune, there is no reason for you not to
take it.
Are there cheaper
short-term loans?
You can find companies
offering such loans with 300% interest per year, but no less. It is not
possible to create a product of this type with a smaller interest, because of
several reasons:
- The payday lenders
are looking for high profits. As long as people are interested about borrowing
money with this cost, they don't need to apply smaller taxes. Only the
government can impose some restrictions, but the authorities prefer to close
the short term credit institutions instead of regulating those
- The risks associated
are high. The loans are approved fast, in the base of a brief verification. As
long as the company has only a limited number of details about the client, the
possibilities of that client to "disappear" exist. When you apply for
a credit at a bank, you will have to give them many documents, including
details about your family and friends. A bank has numerous possibilities of
getting the money back in case you can't pay, while a payday loan institution
can only record you with the Credit Bureau. High risks mean high interests in
the financial world, and this is why the payday loans are more expensive
compared with the common bank credits.
- The loans are
approved on short terms. A payday loan company can only have profit if the
interests are high for the credit facilities that it offers. Even if the
company is fully based online, there are taxes to be paid, employees and
running costs. Those can only be covered if the payday loan company imposes
high interests
What is the future of
this lending industry?
Even if the government
and other institutions warned consumers about the risks associated with those
loans, they will surely be successful in the future. The states imposed
regulations to companies that want to offer payday loans on their territory,
and it seems like the market is more stable today. Many people debate about
interdicting those loans for good, but it is impossible, because this activity
is not illegal. As long as we can't forbid cola only because it contains
artificial sugar, we can't forbid payday loans only because they are expensive.
The problem is that
people take loans of this type when they don't really need them. A payday loan
is useful when the cost of not having that money is higher. Maybe you need to
repair your car, as it is the only method for you to get to work everyday. If
the alternative is taking a cab, borrowing some money until your payday to
repair your own car is a better method to solve this problem. If your child
needs a new cell phone just because the old one is out of date, you can't
consider this as being a reason to take a payday loan.
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