Payday loans are high-interest, short-term loans offered by various payday loan companies. According to various sources like the Financial times, the payday loans are considered as predator products. This is because financial institutions use the method to trap unsuspecting individuals in a debt cycle using them. This mainly involves the low-income and middle-income individuals.
Various senators in the United States are advocating for the eradication of the payday loans among them, Richard Blumenthal. According to Blumenthal, payday loans trap individuals in a debt crisis. He also states that these payday loans are mainly offered to the individuals who have employment records. These lenders use the applicants’ salaries as security. This means that individuals without any sort of income are not able to access this type of loan. It is rather evident that the payday loans have a significant risk to lenders.
Payday loan borrowers mostly use these loans to cover their basic living expenses rather than emergencies. According to a recent research, women aged between ages 23 to 35 rely on this type of loans abundantly to meet their short-term cash demands.
Some people however argue that, this controversial practice usually exploits financial hardship for profit, drains money from low and middle-income individuals, overlooks legal restrictions and uses aggressive advertising and collection practices. In fact, the default rate of this type of loans ranges from 10-21%. The fact that the penalties for defaulting are very high, up to 4000% annually pushes borrowers to pay. This has attracted numerous studies aimed at ruling out this practice in most countries. Most of the individuals in executive positions are trying their best to out rule payday loans through various methodologies.
The decision of whether or not to take a payday loan is entirely dependent on a borrower. These loans make it possible for many people to survive the ever-rising cost of living. Payday loan companies remit funds to borrowers within hours making them ideal for emergencies compared to banks that take weeks. In many instances, they do not require the borrowers’ credit history as opposed to banks. Certain business deals that come once in a lifetime can also be sealed with funds from these firms since the waiting period is significantly reduced. On the other hand, some loan repayment periods may even be extended for up to 6 months though the normal tenure is between 10-40 days making it easy to settle the debts.