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Overview
As the name of the loan implies, a payday loan is one you would take out to cover expenses until you receive your next paycheck. Payday loans are legal in about three-quarters of U.S. states, but their laws vary. The Consumer Federation of America recently said that payday loans range from $200 to $2,500, and lenders charge an average of $25 for each $100 borrowed for about 2 weeks.
Payday Loans First Became Legal In California
In the mid-1990's, the California legislature legalized payday loans, and that quickly spread to many other states. Today, the payday loan business is one of this country's fastest growing industries. Legislators in California and the other states that approved payday loans in their jurisdictions recognized that consumer finance companies no longer had the appetite for small loans that were unsecured. Further, they realized that banks were not satisfying the needs of average consumers because of consolidations and a move toward larger transactions. In almost 15 years, the payday loans are nearing $50 billion and the industry has benefited from annual growth of nearly 25 percent each year.
Debate Rages Over Payday Loans
Advocates of payday loans believe that many people have nowhere to turn for short-term financial help but to companies that offer payday loans. As for the fees they charge, they believe that it is fair and representative of the risk that payday lenders assume. On the other hand, opponents feel that payday lenders take advantage of lower-scale people and that their patronage leads to many bankruptcies. Not very often does an issue illicit such ardent opinion.
Size
Most payday loans are for about $300 and they are paid off when the borrower receives his next paycheck. The amount can be for considerably more, and in some states where it is legal, the borrower can opt for an additional 2 weeks, or even for a longer period. While the average amount a lender charges is about $25 per $100 borrowed, some lenders charge less. It's the borrower's job to find the lowest rate.
Payday Lenders Form Alliances With Banks
The laws governing payday loans are quite limiting, particularly as to how much a lender can charge its clients. For that reason, many payday lenders are associated with banks in other states where the usury laws are more flexible. To stop this abuse, the Consumers Union is using its influence nationally to prohibit banks from making these loans.
Potential
As economic times become more difficult for people, and they are less able to pay their bills, a rise in the number of payday loans is expected. So, too, will the arguments for and against this type of expensive loan. In states where there is a spate of misuse of this type of loan, one can expect stricter laws to be enacted.
