Meet “Dave”, the finance app, which predicts upcoming expenses, and issues alerts to customers when their balance is at risk. Powered by high-end artificial intelligence, Dave is saving hundreds of consumers from expensive overdraft fees and is issuing warnings about the high costs charged by the banks.
Co-founder of this Los Angeles, California-based business, Jason Wilk says the ultimate objective of Dave is to help consumers avoid bank overdrafts because it is one of the most “expensive forms of credit”. Wilk describes Dave as the “weather forecast for money management”.
Not just that, Dave is even promoting payday loans, saying that it is cheaper than bank overdrafts and more customer-friendly.
There is a lot of evidence that shows payday lending is one of the best forms of credit. Let us take a few cases and analyze them to understand why.
Case #1 – Overdraft Fees and How the Banks Abuse Their Consumers
Let’s take an example to understand this better. Assume that a person is a little short of cash and needs only $200 for say making utility payments. No conventional lending agency will offer a loan for such a small amount. So the person has to write checks for the bills, knowing that there is no money in the bank to cover the payment. This is when the bank will charge its overdraft fees.
Usually, for each bad check, the bank charges an overdraft fee of $35. This money is debited as soon as fresh funds are deposited in the bank account. There is an additional late fee as well if this deposit is after the billing month ends.
If the person wrote 3 overdraft checks with a total sum of $100 for paying bills, the total amount outstanding will be $205, when you add the $35 fee for each check. Remember, the original debt was just $100. This makes the interest rate 105%. Now, if we amortize this amount into an annual percentage rate (banks do this for payday lending), then the bank’s interest on overdrafts is more than 1,000% annually, which is much more than the 200% charged by the payday lenders.
Add the late fees, and the total charge of banks will cross 1000%. That’s not all. The 3 vendors that received the bad checks will also charge between $20 and $45, which means, the cost is even more. You could have saved all this by taking a payday loan. Of, course, you cannot write a bad check knowingly. It’s against the law. In most states, this is a jail offense.
Case #2 – Congress Is Rolling Back Payday Lender Regulations
After a hard-fought battle between the financial industry and consumer advocates, the CFPB or the Consumer Financial Protection Bureau issued a draft rule about a year back to rein in the payday lending industry. Payday lending businesses objected saying this was unfair, but these objections were overlooked. Now it seems they have finally realized the truth. The Congress is getting ready to pass regulations to rollback the payday regulations. The U.S. House of Representatives is going to vote soon on the Financial Choice Act. The bill will prevent the CFPB from regulating payday lending businesses.
So, if this bill is passed, the draft rule won’t go into effect. The CFPB is going to be barred from enforcing the current laws. This means that, once passed, the Financial Choice Act is going to remove the authority of the CFPB completely.
The payday industry has been saying for a while now that the restrictions imposed on them is unfair and unjust. So far, most critics and lawmakers have largely ignored these claims, though there have been instances where many of them and even some experts have agreed with what the industry is saying. The fact that the popularity of payday lending continues to grow not just in the United States, but throughout the world, has also been ignored. The millions of people from all kinds of backgrounds cannot be wrong. They have a real need for urgent cash, and see real value in these cash advances.
However, finally, it now seems like, the lawmakers are seeing the point, and are beginning to understand why payday lending is so important.
Case #3 – Workers Taking Payday Loans to Make Ends Meet
According to the findings of a new study, which was carried out in the UK, more and more public sector workers are now taking payday loans to pay off unexpected bills and make ends meet because of the sharp rises in prices in recent times. Many of these workers were found to be “barely managing”.
The study was conducted by one of the largest loan comparison sites. The polled 8000 people who were applying for a short-term term, and analyzed the inputs before the results were published. Most of those polled are council staff, teaching assistants, or nurses. Most of these people stated they need the money to pay off unexpected bulls. More than 10% said they wanted the money to pay rent or a utility bill. Also, it was found that 43% of these people have taken five or more payday loans in the last year.
What is happening in the United States is not much different. The story is much the same. In fact, several studies in the country have indicated that a huge section of the population have to take payday loans to meet their sudden cash requirements because of an unexpected expense. There is no other practical alternative. Banks and other traditional lenders take too long to approve loans. Also, they don’t usually approve small-dollar loan applications for just a few hundred dollars. Plus, it is a fact that a large section of the population in the United States is still un-banked.
Payday loans have come under a lot of attack in recent years. Many regulations and restrictions have also been imposed on them. But the reality is that, these loans are even today an integral part of the lives of many people. They need the cash to pay off important utility bills, pay the rent, buy medicines, make urgent car repairs, and for various other reasons. A family may end up losing their home or a person may miss his medicines if the cash is not made available urgently. That’s how important a payday loan service is for these families and individuals.
Case #4 – Google’s Payday Loan Advertisements
In May 2016, Google announced they won’t show payday loan advertisements through their AdWords PPC service. Many payday lending critics praised Google for this. The policy eventually came into effect in July 2016.
Google banned advertisements when the term of the loan is for 60 days or less. This virtually eliminated payday lending because these short-term cash advances are usually for just a couple of weeks or so.
Most of the sites that show advertisements about payday loans are indirect lenders. They collect important information on behalf of payday lenders. They are payday lending facilitators. In almost all the landing pages of these websites, you will find content that mentions short-term cash or payday lending.
Amidst debates and regulations fact is a large section of the population needs short-term loans, without which they will be in deep trouble. Payday lending is one of the best short-term forms of credit. You just borrow a few hundred dollars, so the repayment amount is less. It’s a short-term loan, so you don’t end up in deep long-term debt. Most importantly, you get the money quickly, which is critical in an emergency. Payday loan applications are processed and approved quickly. The money is deposited to your bank account within 2 to 4 business days.
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