A Payday Loan Can Help Workers In a Crisis


While there is a lot of news making headlines these days regarding payday loans, it seems many people are missing the big picture. While it seems many people are busy pointing out the APR or the amount of money that would be paid out over a year from a payday loan, these same people are failing to note that these are short term loans designed to help people get out of a crisis situation. The average payday loan exists for a term of one to two weeks and charges only a single interest fee.

Payday loans are never intended to last more than a single payday. Because of this, a one-time interest fee is charged that can seem relatively high. While when calculated over the course of a year, the APR equals five hundred percent, actual interest paid is considerably lower, in the range of twenty dollars or less for every hundred dollars borrowed. Currently, there is legislation looking to cap interest rates on payday loans at 36 percent APR, but this would reduce the fees on a hundred dollar loan to less than two dollars, effectively shutting down the payday loan industry.

To understand why these loans have high rates, it is important to understand the purpose of the loans. Payday loans exist for people with poor credit or no credit who find themselves in a dire financial situation. If, for example, a worker?s car breaks down, leaving them no way to get to their job, a payday loan can provide money for repairs within 24 hours, allowing the employee a way to keep their job. Bank loans can take over a month to be approved and paid, and the fees for taxicabs would be far too high for the average worker to afford for such a long period of time, making the fee on a payday loan a much more acceptable charge.

A payday loan can also help people whose only other option would be to write a check that would likely bounce before they are paid. When workers find themselves about to lose electricity or without enough money to feed their families until their next payday, it is a true financial crisis. Without a short-term loan to help them find the money, the only option is often to write a check and pay the bank and the utility or retailer a fee for bouncing it. This can result in hundreds of dollars in charges for even a single check. Payday loans take this need out of the equation by lending enough money to help the customer alleviate the emergency situation.

What is important for people to understand is that these loans are offered to people in a crisis, not to people looking to go on a shopping spree. Interest rates are high because a payday loan has a very short term and companies need the interest to continue to be able to offer the loans to more customers. In addition, the loans are typically provided to consumers with very poor credit, which makes them a risk of not repaying the loans. While the loan amounts are set up to be automatically deducted from the borrower?s checking account, if there are insufficient funds to cover the loan, the lender can lose a great deal of money.

Unpaid payday loans are reported to major credit bureaus, but there is still a large amount of unpaid debt from these loans. This is another reason lenders must charge higher rates. The repaid loans offset losses from loans that go unpaid, helping these companies to continue offering payday loans to consumers. While a payday loan is considered a last option and is not recommended if other choices are easily available, it is still a very necessary service.

When a consumer is faced with the inability to pay for necessary services or basic household goods, short term loans are often the only choice available. For consumers who would be in truly dire circumstances without such a loan, the interest rates are truly a small price to pay. While not optimal for everyone, for many it is the best option available. Without interest charges, a payday loan would simply not be an option, leaving many people without the ability to pay debts.

Payday loans are simply a necessary service. When a customer loses use of their vehicle and can no longer make it to work, the financial ramifications can be extreme and can even result in a total loss of income. When a simple loan is available that charges a moderate fee in exchange for lending the money needed to help a customer out of such a dire situation, the simple fact is that it is a needed service. A payday loan may not be a wise choice for everyday desires, but when a true financial emergency situation arises, it can certainly be a saving grace for a large number of consumers.