In real emergencies payday loans companies helps people – no banks, no other financial institution is there to help except payday loan lenders. Read below an interesting case.
The Guardian newspaper reports a very sad incident at Birmingham in the UK recently. Somebody died recently in a Muslim family in the city, but the family was unable to meet the funeral bills of £6,000 because of rising costs. To add to their woes, authorities were not releasing the body as they couldn’t foot the funeral bill. It was a serious situation as according to Islamic traditions, funerals must take place in 24 hours.
So what happened finally?
It was a payday loan company that came to the family’s rescue. No bank, no lending institution cared about the dead person, the family members, or Islamic traditions. It was a payday loan company that offered the real help in an emergency.
The US Is No Different
The above incident is not an isolated case that is just restricted to the United Kingdom. It’s much the same in the United States as well. Hundreds, if not thousands of families are living close to the poverty line. A huge section of the population isn’t living – they are simply “sustaining” with “barely enough” money. The existence is often from one paycheck to the next.
And the behavior of banks and other lenders is much the same. They are denied credit. Most of them have average to poor credit score. They have nowhere to turn to in real emergencies, situations where they need cash urgently.
The only hope – once again, it is the payday loan industry.
Money is certainly expensive when you are poor, as is evident from the experience of millions of poor Americans. Paying a bill isn’t an odyssey for them. This is a part-time job in itself, and they cannot turn to anyone for help, except the payday loan businesses.
Is it Pointless to Debate Payday Loans?
Paige Skiba, who is a behavioral law and economics professor at the Vanderbilt University at Nashville in the state of Tennessee, certainly believes so. Many people are critical of cash advance loans and a lot of bad things have been said about them, while others have supported them.
But to a large section of the population, this debate is pointless, Skiba says. That’s because, these people will always approach the payday companies when they need cash urgently, if conventional lenders and banks keep refusing credit to them, like they are doing currently. After all, it’s the only source of credit for them. She points out that we need to examine the behavior and motivation of borrowers and the eventual outcome.
John Caskey, a professor of economics at Pennsylvania’s Swarthmore College, which is also sometimes referred to as Swat, agrees with this view of Paige Skiba. John says that we cannot so easily conclude that payday lending is bad.
Skiba has carried out extensive research and found that people who approach for payday loans have an average credit score of 520. The overall population’s mean is at 680. This means that it is very rare that these people will get a loan from another source even if they applied. In fact, many of them have approached conventional lenders before and been denied credit. So when they approach payday firms, it’s their only hope.
The decision these people make at that point is “completely rational”. What happens afterwards is a bit beside the point as these individuals are in a dire financial condition when they are applying for a payday cash advance.
It would be cruel to deny them the credit. It can even break down the American economy itself if a large section of the population went completely broke, and had to declare bankruptcy. Often, many applicants repay another loan with a payday advance. What would happen to these creditors if these people declared bankruptcy, she asks. It could be even worse. For instance, what will happen to the thousands of individuals who approach these creditors?
Where the Center for Responsible Lending Has Gone Wrong
The Center for Responsible Lending has mentioned that the default rate for payday lending is very high. It is anything between 30% and 50%. Those who want a clampdown on this industry will often site this as an argument.
However what they fail to mention in their reports is that, these defaults are just after several interest payments. In other words, the situation can get critical for a customer when the person has not been able to pay back the loan at the original due date, and the loan was rolled-over as a result. It needs to be mentioned here that not all states allow loans to be rolled-over. So this protects consumer interest.
In our experience, a very high majority of clients are extremely serious about paying back the loan on time. In fact, 95% of the payday loans are paid back within the due date, so there is rarely an issue. And besides, you are likely to get into a debt trap if you roll-over any other type of loan as well. So why victimize the payday industry?
Payday Lending – The Best Temporary Solution
Make no mistake about it! A payday loan is not the solution for your long-term financial crisis. Having said this, it is still the best temporary solution for an immediate cash-crunch situation.
These loans let families borrow a few hundred dollars so that there can be food on the table, they keep the heat and light on, and families solving their medical emergencies.
Skiba says regulation cannot stop the industry. Payday businesses will keep opening new store fronts, and people will keep approaching them. That’s because, there is a greater problem in the economy – lack of emergency financial insurance, and the financial system not offering easy credit access.
According to estimates, 12 million Americans are taking payday loans every year now. The average loan amount is $375. On due date, they have to pay back $430.
Revelations from the Pew Charitable Trusts Survey
In spite of all the criticism, a survey carried out by Pew Charitable Trusts indicates that 48% of borrowers feel that these loans are very useful. This percentage would have certainly been much higher if there wasn’t so much bad press on payday loans all the time. On the other hand, 41% said that these loans hurt. 8% respondents said that payday loans are good, with moderation, which by the way is already there.
More than 50% of the borrowers said that these loans provide relief from stress. 3 out of 5 borrowers thus want to take them again. 37% borrowers even said that they will take a payday advance no matter what the terms. 81% borrowers are not worried about debt. They are smart enough to cut spending elsewhere, such as food and clothing to pay back the loan on time.
So it’s clear that most consumers find payday loans very useful and remain committed to paying back their debt.
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