Payday Loans Debate, an Alternative Loan On the Rise

Posted by Sara M. Varese

February 26, 2010 Los Angeles, CA.  Pay1Day.com. As new consumer protection acts decrease traditional lending opportunities, alternative loans, namely payday loans, have been on the rise, along with debate from both the consumer and lender standpoint regarding policy and practice. No Credit Check Payday Loan

Comparing to traditional loans,  payday advance loans costs can be attributed to the ease and speed of acquisition with minimal requirements of income, credit history, and housing, along with the resources needed to dispatch loans more easily and faster, usually under one business day.  Because of these inherent risks, payday loans are offered at a higher cost. Nonetheless, growing controversy continues as the rate of borrowers taking out payday loans increases, questioning the loan’s interest rate, fees, and policy as well as their necessity.

The usual payday loan fees are $15 – $35 per $100 borrowed within a 2 week period (the period in between pay dates) and are meant to be taken out only in real need when other alternatives are unavailable, such as borrowing from friends or using credit cards.  In addition, payday cash advances are intended to be held just in between pay periods and not throughout the year, hence its name, “payday” loans.

Payday loans are not new inventions. Big banks have increasingly extended similar types of products under names like checking advance services, with Wells Fargo offering such a product since 1994. The major difference is that payday loans, offered by independent financial institutions, are not backed by the federal reserve, offering a greater risk to the payday lender, seeking counterbalance by passing costs to the borrower.  In addition, with the above-average payment default rate in the payday industry, it becomes more clear why higher risk loans, such as payday loans, come at a raised price.

Payday Loans Debate

If a loan is paid in full upon the first due date, then the interest rate of this loan falls approximately between 15% – 35%. The problem occurs when the borrower is late on payments or makes a minimum payment that results in rolling over a balance to a next term because additional fees will be applied to the account which can become very costly, especially if this is made into a regular habit.

The choice to apply for and obtain a payday loan is up to the customer.  However, the duty to notify the customer of the loan’s terms and fees befalls on the lender. If the customer agrees to the lender’s upfront notice regarding rates, terms, and fees, then that results in a contract with no foul play, not different from the decision of paying the premium price tag for designer clothes or luxury automobile.   In that case, it would not be similar to a hidden overdraft protection fee or arbitrary credit card interest rate hikes.

The problem occurs when there are concealed terms and fees such as the ones resulting in the Overdraft Fee Legislation and Credit Act of 2009 that protected consumers from too-small-of-a-fine-print terms and unfair interest rate hikes. If a customer is made fully aware of their terms and fees obligations, a providing lender, whether it be a bank or a payday lender, should not be held liable for the customer’s inability to fulfill them.

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