The payday loan industry has only been around for the last couple of decades, but its impact on the economy has been tremendous. In the US now, there are more payday lending businesses than McDonald’s restaurants. Millions across the country are taking these small-dollar loans.
But it’s not just the United States where the payday loan industry is booming. It is booming in the United Kingdom, Canada, Australia, and in many other countries. In fact, in the UK, according to estimates, there is one payday lending shop for every seven banks. In Australia, more than a million people take these loans to fund their short-term cash shortfalls. While the statistics clearly prove how popular they are, there is a popular misconception that only the poor and the marginalized take these loans.
Nothing could be further from the truth. The truth is that, many take these loans to improve their credit.
Payday Loans for Improving Bad Credit
Many payday lenders claim they often provide “bad credit solutions” to people who need money quickly. A sizeable chunk of the applicants are actually individuals with negative marks on their credit file. Even those who high-income people may have a poor credit rating and so, high-income earners might also find payday lending most useful.
The fact is that, Americans with a high income may also have a cash shortfall, just like people in the low-income bracket. A poor credit score will make their life difficult, even though they are presently making good money. Sometimes, the credit rating agencies will take several years before they update their records, and so the poor rating may stick around for quite a long time. With poor credit, those with high-income will have limited access to finance. So they may be in a position where payday loans are the only option.
Understanding It Better
For example, let us assume that a person is making around $72,000 a year. Let us also assume that the person has a car, is paying mortgage, and has poor credit. Remember, high salary does not necessarily mean a good financial situation. A good chunk of the monthly earning will go away towards the car loan and mortgage. And if the person has maxed out his credit cards after a holiday, then there is a high chance that he will be short of cash at the end of the month.
Where does the money come from if there is an emergency home repair to be made, or a car repair? A payday loan may be the only option. Remember, the banks or the other financial institutions will be unwilling to offer credit because of the poor credit score.
Business & Investments
The nature of wages earned by many high-earners is also often unreliable and inconsistent because they are self-employed. Their incomes or assets could also be tied up in investments. There can be shortcomings in business and personal finance because of the earnings is volatile. Many of them as a result need quick access to credit. Payday loan is the right solution because the money received is almost fast. There is very little documentation needed.
For most loans, you will have to show a regular income or at least a stable income source so that the lender is confident that you will be able to repay your debt. It may be difficult to get a traditional loan if your assets and income is tied up in volatile investments. Often, people who are making money in this way, also find that their existing credit lines are maxed out. In this situation, a payday loan could be the only viable option left.
A Payday Loan Is Useful For Businesses Too
There are problems with business loans as well. Many businesses have limited access to finance because of fluctuating cash flow. It may also happen that the money is tied up in business assets. Some businessmen end up risking their personal finances for making business purchases. Short-term business financing could be the solution. Business payday loans could help them solve the crisis.
With these loans, the applicants don’t have to meet the conventional requirements as needed by the traditional lenders and banks. Business payday loans are issued if the business holds a rental lease, earns above a specific revenue amount each month, and if the business is operating for a minimum time duration.
With traditional business loans, the creditor will carry out extensive business and personal financial checks. This includes financial forecasts, credit checks, and details of how the money is going to be spent. With business payday loans, on the other hand, it is much easier, just like a personal payday loan. Many businesses that cannot get credit from a conventional source in spite of earning a lot of revenue approach these lenders.
The Economy
The global economy is never stable. It always goes through ups and downs, and so anything can happen anytime. It can be worse when there is turbulence. Many high-earners have felt the pinch after the global financial meltdown of 2008. The number of payday loans spiked in the United States after 2008. Many people were so desperate they even traded jewelry or other assets to get the all-important finance.
In Australia, people have become more disciplined. The ING DIRECT Household Financial Wellbeing Index shows that people in the country are now saving more and spending less. In the US too, many more individuals are now trying to save as much as they can. But spending less is not good for the economy. It leads to lower sales and production cuts, which eventually slows down the market conditions.
In spite of the increase in savings, people are still struggling between paychecks. Many homes are still using credit cards to pay for their expenses and the bills. Surveys have indicated that a couple of hundred dollars more is needed each week for these homes to be financially comfortable. More than 15 percent homes report they always feel the pinch, particularly in the last 10 days of the month.
Using the credit card is one way of paying for the expenses between paydays. But with many individuals, the credit cards are already maxed out. Also, those with negative marks on their credit file may not even have credit cards. In this situation, a payday loan may be the only practical option left, even if you are earning a decent salary.
People Who Take Payday Loans Are Not Always the Poor
Those who take payday loans are often stereotyped as poor or marginalized people who have low income or cannot manage their finances efficiently. But the reality is, not only the poor, but decent earners take these loans too. They come from all over the United States from many sections of the society.
A lot of restrictions have been imposed on payday lending already. Millions of Americans are taking these loans because there is an urgent need for them, but still, many people have been critical of payday lending. The lawmakers are planning new ones, even though there really is no alternative to this short-term cash loan.
We propose a thorough investigation on the deep impact of imposing more restrictions on individual finance, and the economy at large before any further steps are taken.
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