While it is true that there is indeed a market for payday loans in the United States today, the industry does have its critics. Even the detractors must admit that if the traditional lending markets served the people that use the payday loan industry better there may not be a need. Unfortunately there is a large group that seems to be falling though the cracks, many of these folks feel that a payday loan is there only option.
Despite the fact that critics of the industry recognize that traditional lending institutions fail to provide consumers with adequate credit, they question the industries loan fees and lending practices. Some may even question the need for the loans at all. These critics claim that lending fees are far in excess of the cost of default risk and the administrative cost of handling these short term loans. They insist that the payday lenders are engaged in predatory loan practices.
One of the tactics that they dislike is what they feel is false and misleading advertising that may exaggerate the benefits or understate the true cost of the loan. The most damning criticism of the payday loan industry is that the cost and structure of the loans entraps the consumer into what is referred to as a “cycle of debt.” Many argue that even if a consumer takes out a first loan to help with a unplanned expense it may be difficult for the payday loan customer who is living paycheck to paycheck to pay off the loan and still have remaining funds to pay off their everyday expenses. As a result the borrower may renew the loan and incur additional fees. In some cases this cycle will repeat until they have paid more in fees than the original loan.
Certainly critics can point to high fees and the possible cycle of debt that some may get them into. However the underlying question is why people use payday loans. Rational customers would never borrow money with an interest rate of up to 450%. But when you are faced with an illness and have to miss work, or need a vehicle repair to get to work and you cannot borrow anywhere else, the payday loan may be the only alternative. Hopefully those that choose this option can pay out after the first loan and not get themselves in a “cycle of debt.”
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