According to the FDIC, 25.6% of ALL US households are underbanked. Payday lenders and cash advance companies provide an outlet for these households to obtain funds. Even though the costs are high, payday lender provide a service to their customers.
Payday loans are low-dollar, short-term, unsecured loans marketed to subprime or high risk borrowers. Interest rates can exceed 390% percent, much higher than state usury limits. (yet, interest rates on cash advances on credit cards can be this high or higher).
Some argue that payday loans take advantage of, uninformed borrowers. The government is now taking a closer look at implementing new regulations for the industry.
But, could new regulations actually hurt consumers? Restrictions could deny borrowers access to credit. Or force them to obtain loans at even higher rates.
Rates for payday loans don’t appear to be high if the loan is paid back within a short time frame. For example, an average payday loan from a retail store costs about $15 per $100 borrowed if paid back within 2 weeks.
The problem arises when borrowers do not or cannot pay back the loan within the time period. Resulting in the need to take out a new loan to pay off the old one. On average, borrowers roll over loans over 8 times a year. This is known as a debt spiral.
For many borrowers, payday loans are the only available source of credit. If a car breaks down, the rent needs to be paid or the family needs groceries, payday loans fill in the gap.
Restricting payday lending can also damage borrower’s credit standing with more traditional lenders. For example, it can sometimes make sense for a borrow to use a payday loan to pay off a standard loan, rather than risking default.
Since payday lenders seldom report to credit agencies, a default on a payday loan would not hurt the borrowers’ credit rating. Payday loans can also borrowers protect credit ratings by reducing the number of outstanding loans reported to credit bureaus.
The effective interest rates associated with cash advances on credit cards can be as high or higher than as payday loan rates, And cash advances on credit cards can potentially result in a negative mark on a credit report. Therefore, using a payday loan rather than a cash advance can make sense.
Restrictions on payday lending can also impact customers by eliminating a popular convenience. Convenience is the number one reason people cite for using payday loans.
Payday lenders could justify high fees, arguing that operating expenses are high. For example, maintaining storefront locations with extended hours of operation is costly.
But online payday loans are more expensive than storefront loans. And operating costs are lower.
The better argument is that the incidence of default on payday loans is as high as 15%. This means that payday lenders are never going to recover a substantial percentage of loans.
Lenders use ACH credits to direct deposit loans to borrower's bank accounts.
For repayment of loans, lenders use either ACH or Check 21 echecks. Both these options elecctronically debit the repayment from the borrowers' bank accounts. And automatically deposit the funds to the lender's business bank account.
Some lenders also debit cards for the repayment of loans. Debit card merchant accounts are available to lenders who process high volumes of transactions per month.
The payday loan industry has arisen in response to the market. Millions of Americans depend on payday loans.
Payment processing is available for lenders. You can establish ACH, debit card, and echeck accounts to meet the needs of your business.
Are you a lender that want to establish a payment processing account?
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