Americans need to be able to have access to payday loans. In the United States, 49% of people are living paycheck-to-paycheck. Many of these Americans have a family to raise and may work multiple jobs to do so. They are just trying to make enough money to cover bills. Most do not have a savings or emergency fund. So, what happens when emergency expenses arise, and they need to pay an unexpected bill immediately? Some people might suggest they get a credit card or collateral loan. What happens if that person is also one of the 53% of Americans that are rejected for loans and credit cards due to poor credit history?
This group of people are now limited in their options of where to turn for financial assistance. If resources within their extended family or community are not available, there is nowhere for these consumers to turn. That is where payday loans and other similar, unsecured loans enter. This resource is prevailingly available for those consumers that are unable to exercise another alternative.
In this article we will discuss why people use payday loans, how rates are determined, and why there is a stigma towards providers and the people that use these loans.
Many Americans use payday loans. In a single year, about 12 million Americans will use one. Most US states do not even have a population of 12 million people!
Contrary to popular belief, it is not only low-income people that consider using a personal loan. It is everyday people whose income just covers day-to-day costs of living. Families with an annual income of $30,000 may use these loan options. Families with an annual income of $150,000 and no emergency savings, may also use these loan options.
From young college students to older couples on the brink of retirement, there are many people that use short-term payday loans. Most believe that the audience using short-term financial solutions are less educated, but that would be incorrect. The most common demographics are 30–55 years old. They have some college education or a bachelor’s degree, and even have a stable income. Your neighbors or friends could have used a pay advance in the last year. There is no way you would have ever known unless they told you.
The reality is, no matter how prepared you are for financial challenges, there can be things you are not prepared for that throw your finances out of order. Maybe it is an emergency medical bill, maybe it was a last-minute purchase that was not completely thought through.
People use payday loans because they need money and do not have many options. They cannot get approved for other loans. They do not have family that can just give them cash. Payday loan customers know that their loan provider will not judge them. They also do not have to risk putting up their home or car for collateral. Many people use these loans because they are convenient. There are even online payday loan providers like netpayadvance.com who can provide emergency funds the next business day. Applicants would not need to leave the comfort and safety of their home and can manage their loan from application to repayment completely from their computer or smart phone. Applicants that are currently under a shelter-in-place order, or voluntarily practicing social distancing, can still access online cash advance options.
Pay advances are used to cover emergency or unexpected costs. Many people use them to cover necessary home or auto repairs. People may use online payday loans to cover a medical bill. Most Americans do not have funds stashed away for costs like these. An online personal loan can allow them the opportunity to break up a large cost between two pay checks.
Depending on the state a person lives in, they may rely on a car. If they cannot commute to work, they cannot get a paycheck. A family that is unable to cover this month’s mortgage, could risk losing their house. In situations like these, a payday loan can offer short-term relief that helps support a family for the long run. It allows the parent to continue working. It allows the family to continue living in their home. There are many similar situations where a payday loan truly helps.
For many states that are currently on lockdown, including California, an online payday loan option can be convenient in a time of need. Many families are temporarily down one source of income. A parent may have to stay at home to take care of the kids. A spouse could be laid off because they work in one of the industries that has seen a mass of layoffs recently. There is Coronavirus paid sick leave, but the new law still excludes millions. A parent could be home sick for over two weeks, without enough pay to cover their bills this month. They could lose a side job or be worried about losing their main source of income. These are all reasons people apply for a little extra cash.
Payday loan providers must have higher fees than other lending options for multiple reasons. One reason is because these loans require no collateral and most do not require a credit check. Another reason is because providers do work with high-risk customers, that default on their loan at a higher rate. While waiting for these funds to return through collections, lenders need to ensure they can continue providing funds to others, even if one or two customers default. These companies need to make enough money to stay open and continue helping others.
Providers cannot just magically make the fees lower. Fees can only go down if higher percentages of borrowers pay back loans on time. There is an extremely high rate of default in the industry. This is the main reason lenders are unable to reduce fees. Some companies have developed customer incentive programs. These programs reduce rates for customers with good payment history. Other lenders provide information to customers on how to keep their loan costs low.
People only get upset about high rates and fees when it comes to payday loans. No one bats an eye at credit card companies having a 24–27% APR. No one bats an eye when banks charge high overdraft, ATM, and maintenance fees. Some people even take out a loan just to avoid these high bank fees!
So why do people complain about payday loan APR? The truth is APR was meant to be calculated annually, hence the name “Annual Percentage Rate”. A short-term payday loan is repaid in weeks or months, not years, which means that calculating APR on this type of loan will always produce a skewed result. Online payday lenders charge for their service with a flat rate fee that is calculated per $100 borrowed.
The most comparable financial fee to a short-term loan fee is a bank overdraft charge. In 2019, the average overdraft fee was about $33! Calculating the APR on an overdraft fee would result in a much higher percentage than the average short-term lender.
Here is an example: a person who overdrafts their account could be charged $33. They still will not have money to cover their purchase or the overdraft fee. Also, the bank account overdraft fee is the same amount no matter how much they were overdrawn. If you over drafted by $1 or $100 you would still be charged $33 per transaction. Alternatively, that same person could pay about $18 to borrow $100 to make it through the end of the month. That is a savings of $15! Furthermore, the bank is only obligated to notify the account holder via mail. This means that the same person could be charged multiple overdraft fees without knowing, resulting in their bank account falling well below $0.
Some people do not like pay advances because they have only heard horror stories. They have heard about payday loan debt cycles where people just keep getting new loans to pay off old loans. It does happen. But it is not the only story that exists. There are plenty of people who just need a one-time cash advance. There are plenty of people who go through a rough patch for a few months in their life. Some people get personal loans to split up a large payment over two pay periods. There are many people who will only get a handful of online payday loans throughout their life.
People that are against payday loan providers have likely never been in a situation where they needed money. If they were, then they probably had opportunities that others do not have. They may have had a higher credit score. They may have had family and friends that helped. When people say that they are against payday loan providers, they are against people having an opportunity to get a little bit of cash that can help them out a lot. They are against letting people have access to funds that can help them.
In conclusion, for many, a pay advance is helpful during stressful financial times. Millions of Americans rely on emergency payday loans. People from many different income levels use cash advances. They just do not have the savings necessary to cover a specific bill. Some families use online cash advances to temporarily supplement lost income. One parent could have lost their job, or they could have lost a side job. Others use online personal loans to cover emergency expenses. Due to the high default rate, loan providers charge a set fee per $100 borrowed. This level ensures that they can continue to operate and help others. People that have a stigma towards loan providers, and the people that use them, have likely never been in a similar situation.
Removing Americans’ access to online pay advances limits their independence. It could block them from being able to support themselves or their family. Online pay advances may be the only option that some people have. Loans like these are essential, especially during times of emergency.