People have always needed small, short term loans, and someone has always been willing to provide them. Today's flourishing industry of payday lending looks a lot like the "salary lenders," later renamed "salary buyers," that thrived in the late 19th century. These days, if a person needs to borrow $200 on the first of the month, they will write a check for $235 dated the 15th. When the 15th rolls around, they either pays off the loan in cash or the lender cashes the check. If they can't afford to pay off the total amount, the lender will roll over the loan for an additional fee.
Even one hundred years ago the critics of "salary loan lending" called such people sharks and leeches. Today consumer advocates call payday lenders "predatory" and "legal loan sharks." Borrowing money at triple digit interest rates is never the right answer for people in debt. Consumers in need of short term cash should avoid particularly expensive short term loans, and] instead should build up an emergency savings account to cover financial emergencies. They should also seek budgeting and debt management advice from non profit consumer credit counseling services, and shop for credit based on both the dollar finance charge and the Annual Percentage Rate.
Yet people short on money often ignore the advice of the experts and instead turn to the scurrilous moneylenders. This was true a century ago, and the behavior is still with us today. The best estimates peg the payday loan industry as growing from a few hundred stores at the start of the last decade to roughly 12,000 today, lending over $15 billion a year.
Some feel that consumer's financial literacy is not necessarily high enough that they are aware that an 18 percent overdraft loan on their checking account is better than a 350-to-700-percent payday loan. However, according to a Georgetown study, three out of four customers pegged the dollar cost of their loans accurately. The annual percentage rates may well be excessive, but payday loans are often less expensive than the alternatives. The payday lenders are assailed for collecting $1.8 billion in fees a year, but some advocates say the banks charge $7.3 billion a year for bounced checks. If you convert that to an APR it goes up to more than 5,000 percent.