What is a payday loan?
Payday loans are loans usually of less than $1,000 that have to be repaid within two weeks. Payday lenders charge high fees for these loans that equate to 200-400% interest or more. For comparison, credit card interest rates are 12-30%.
Why do people get payday loans?
People who use payday loans don’t have high enough credit scores to get a real loan from a bank or credit union, and they don’t have any savings. When an emergency happens – like a car for getting to work breaks, or a medical bill hits – payday lenders promise an “easy out.”
Why are payday loans a problem?
Payday lenders are legally allowed to exploit people in desperate situations, luring them into expensive loans with zero consideration for the person’s ability to repay. In fact, the lender benefits most when their customer cannot repay, as the customer is then forced to “roll over” the first loan by paying high fees. This cycle of debt can last over a year, with the customer paying back twice the amount borrowed.
Payday lending is such a pervasive problem that it has been outlawed in some states. Yet it is so profitable that payday lenders will go to extraordinary means to find loopholes, including licensing as “short term $300 mortgage lenders” and partnering with Native American tribes to gain sovereign immunity.
What is the solution?
First, enact legislation that stops predatory lending and/or enables legitimate financial institutions to create market alternatives. Second, encourage financial institutions to create payday loan alternative products. Third, educate consumers about what they can do to avoid taking a payday loan.