It is important to know the features and benefits of bank loans and payday loans to know the truth.
Payday lending has been receiving bad press over the last few months. Some people are claiming that these loans charge outrageously high interest rates. Further, it has been pointed out that the payday lenders follow predatory practices that can push their consumers back against the wall and send them spiraling down the debt tunnel from where it is difficult to escape. The entire industry of payday lending has faced a lot of criticism on these counts.
Is the industry really this bad? If it was, then why do the millions of Americans still prefer these loans over other credit sources?
Here’s the reality – stack up the costs of payday lending, and compare them with the fees of traditional banks, and you will find a different villain. It appears, the millions of Americans are not wrong, after all.
The Payday Loan Details
Most payday lending agencies offer short-term personal loans where the average cost is between $12 and $22 for each $100 you borrow. In other words, the interest rate is usually between 12% and 22%. The actual loan amount is rarely above $1500 or $2000 max. These are short-term loans where you have to pay it back within two or three weeks, after the next pay check arrives. The money is deducted automatically from the bank account that you have provided while applying, and the account where the lender had deposited the amount.
The Charge and the Real Question to Ask
Those who oppose payday loans say that when their percentage is amortized over the full period of one year, the APR or Annual Percentage Rate would come to a staggering 200%. Yes, truly the APR or 200% certainly seems outrageous, but the real question is, why are the opponents of payday loans attaching an unusual percentage rate for loans that are typically for 2 to 3 weeks?
Ask this question, and you will begin to see a self-serving purpose of the true villains.
The fact is that, most groups that vehemently oppose payday loans and other short-term personal loans are made up of big banks and traditional lenders. They claim to oppose such loans to protect the average American consumer. Take a deeper look at these so called “protectors” and their practices, and you will find a different story.
The Abusive Bank Overdraft Fees
Let us assume for a moment that a consumer with an average bank checking account is running short of cash and wants $200 till the next pay check arrives to pay for groceries and pay a few small bills.
In reality, it is almost impossible to get a loan of just $200 from a traditional lending agency in less than 24 hours, particularly if you have less than perfect credit. In the absence of a payday loan, the consumer will be left with no other option but to write checks for these bills, even though he knows very well that there is no money in the bank to cover for the checks. So the bank will charge him overdraft fees.
With most banks, these overdraft fees are about $35 for each bad check. The money is debited automatically from the account the consumer holds with the bank, as soon as fresh cash is deposited into it, and if the deposit comes in after the billing month ends, then the bank will also charge an additional late fee. This will further increase the money that has to be paid to the bank.
How Banks Charge 1,000% Annually, While Payday Lenders Charge 200%
Let’s say a consumer had to write 3 overdraft checks with a total sum of $100 for paying bills. With a $35 fee for each check, the total outstanding amount would now be $205, for an original debt of $100. The simple interest rate here is 105%. Reality check! Now if we amortize this amount into an annual percentage rate (like what the bankers do for payday lending), then the bank’s interest on overdrafts will exceed 1,000% annually, which is way higher than the 200% charged by the payday loan companies.
But wait, the late fees charged by the banks are yet to be added. Add them, and what the banks are currently charging the consumers will go way beyond 1000%. Point this out to the banks and other traditional lenders, and you won’t get a satisfactory reply from any one of them.
It Can Get Even Worse for the Consumer
The bad news for the consumer isn’t over yet.
In the above mentioned hypothetical situation, the three vendors that received the bad check are likely to charge the consumer between $20 and $45, which means that the cost of not taking a payday loan becomes even higher. Plus, you cannot write a bad check knowingly. It’s against the law. In most states, this is a jail offense.
In spite of what the large corporate banks, and the lobbyists want you to believe, if you take an objective look at the whole picture, you will begin to realize that the payday lending businesses are actually offering you a better deal. In fact, the payday lenders are often the only hope for the low-income and even the middle income consumers, who would otherwise have extremely limited credit options with conventional banks.
So consumers in the United States need payday lending. The truth is, these businesses would have been wiped off, considering the fact that so many restrictions have been imposed on payday lending in recent months, if there wasn’t such a great demand for these loans, and if consumers didn’t find the service useful.
Traditional banks and lending agencies aren’t flexible enough to meet the requirements of consumers who need quick cash in an emergency. They are not listening to the genuine needs of people who don’t have perfect credit history. Many of these banks are even not interested in small dollar loans. A loan of $1000 for 2 weeks is not a big deal to them – it doesn’t help them achieve their high ambitions. But that’s all an average consumer needs. It’s what the market needs.
Currently, there is no product in the market that matches the requirement of the average consumer better than a payday loan. There is no alternative to these quick cash loans, and that is the reality.
Also, don’t believe for a moment that the industry is charging you very high. Take the above hypothetical case as an example. It clearly shows how the traditional banks can charge over 1000% annually, while with the payday industry it is just 200%. The actual effect is way softer as the loan amount is smaller and the term is just for a few weeks.
So the payday loan companies are not the villains they are made out to be. If there is a villain, then that is your big bank president who sees the payday lender as someone who is encroaching upon their profit margins. Always remember, the big banks are hiding their steep overdrafts and late fees, while trying to “protect” the American customers.
So do not worry apply for your payday loan today.
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