Are Payday Loans Really The Bad Deal The Federal Government Says They Are?

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Have you heard the Federal Trade Commission has issued a “Consumer Alert” with a big headline that says, Payday Loans = Costly Cash. Just as there are many ways to look at the situation, the same is true with payday or cash advance loans.

In simple terms, a payday loan is advance on your next paycheck. There are many companies throughout the country that offer these very short-term small loans. The term, or length of time you have to pay back the money typically runs from …

Have you heard the Federal Trade Commission has issued a “Consumer Alert” with a big headline that says, Payday Loans = Costly Cash. Just as there are many ways to look at the situation, the same is true with payday or cash advance loans.

In simple terms, a payday loan is advance on your next paycheck. There are many companies throughout the country that offer these very short-term small loans. The term, or length of time you have to pay back the money typically runs from 2 to 4 weeks. The fees or costs of this short-term loan can be anywhere from 25 to 50%. And this is where the FTC comes in with their complaint.

The government agency spends a lot of time acting like they help consumers. The government has the authority to make changes in how these loans are offered if they were really interested in helping or protecting consumers. Instead however, they state that the APR or annual percentage rate of the small loans is in the hundreds of percent in the are right, but that’s not the whole story.

Everyone knows that when you buy a product in a small package it costs more. Larger or bulk packaging usually costs less. Now consider how this fact as it relates to the payday loans.

Consider these facts:

1. A payday loan usually is anywhere from $200-$500 dollars. In the lending business, this is a very small loan amount. It’s reasonable then, that the cost of this service would be more expensive than a larger loan.

2. A payday loan is as much a service as it is a loan. Although a bank or credit union may offer a lower interest-rate, how many of them would be willing or able to front you a couple hundred bucks to tell your next paycheck?

There’s also no way a bank or credit union would be able to process your loan in just a couple of hours like a payday loan service does every day.

3. Consider payday loans in their costs against other purchases.

When you buy something at the store, the price charged can be broken out into two parts. The first part is the actual cost of the product. The second part is called a markup. A markup is simply the difference between the actual cost of the product and what you are charged as a customer. The markup covers the building, employees, and other costs of running the business including profit.

When going out to dinner with food cost is a very small part of the overall total you’re charged. Furniture, jewelry stores and many other retail shops have markups that are much larger than a typical payday loan that’s payback on time.

Jewelry stores and many other retail shops have markups, which is the amount of money over the cost of the product, that are much higher than in on-time payday loan.

So when you look at a payday loan as a service, and the fact that when the loan is paid back on time, the actual interest and fees are really quite reasonable. I would not disagree with the FTC that keeping a short-term payday advance loan active and continue to roll it over can be very expensive.

The use of a payday advance loan in an emergency situation and for a short period of time can really be a lifesaver.

Americans have always been lectured on credit, especially the evils of credit. This lecturing is usually done by consumer groups, charitable organizations, banks and government agencies. Some of these groups are totally divorced from the everyday lives of normal Americans, while others are responsible for running up debts measured in billions of dollars. Sensible Americans have usually taken this advice with caution, and gone on to make informed decisions on their credit needs, taking into account their own circumstances and ability to repay such credit.

Faxless payday loans are now a fact of everyday life. Like all new products on the market, when they began, they attracted a fair share of ‘quick buck’ merchants. This is inevitable in any emerging market. But with time, and the emergence of ethical, customer orientated companies, and with State and Federal regulation, this market is now considered mainstream and is used by mainstream Americans.

Online payday loans, as most of the providers explain, are short term small consumer loans. They are designed for short term cash outflow problems and are not designed for long term loan commitments. Most consumers know this, and treat them accordingly. Looked at in coldly clinical terms, yes, their APR is high, varying from 250% to 500%. But normal people do not think in APR terms, they think in dollar terms. They can see that a long term loan at 500% is financial suicide, but they can see that a two week loan at $15 per $100 borrowed is a totally affordable short term solution to a short term problem. If the alternatives are taken into account, bank charges for bounced checks or late payment, embarrassment and damaged credit ratings, then an online payday loan can be looked on as a normal, mainstream option to normal mainstream problems that arise every day.

Unlike the 20th Century loan shark customers, Faxless cash advance customers are considered part of what consumer advocates consider the financial mainstream. Also, unlike loan sharks, payday companies do not target the poor, jobless vulnerable people. To qualify for such a loan you must have a job, you must have a minimum monthly income and you must have a checking account in good order, in other words, be part of today’s financial mainstream. Half such borrowers come from households with incomes between $25,000 and $50,000 a year, according to an industry-funded study conducted by Georgetown University’s Credit Research Center. A quarter make more than $50,000 a year, and a quarter less than $25,000.

These loans are now just one of many credit products available to Americans. Used sensibly, for what they were designed for, they can save you a lot of hassle, embarrassment, protect your credit rating, and indeed can save you money.

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