Lend VIP.com A payday advance is often a short term personal loan given up against the customer's next paycheck. Typically the fee is approximately $15 for $100 loan for 14 day period. Thus the credit carries an APR of 390% (15x26). The critics of these cash advance practices are convinced that this really is usury, that the fees are excessive and unreasonably high.
Lend VIP.com Critics also are convinced that the cash advance practice drains money in the low income community who will be already short on money, thus creating additional burden about the people. Some also have said that this practice exploits financial hardships of low income families for profits and trap them in vicious debt cycle. So the question arises: Does the payday lending business use a place in society?
To see why it is crucial to profile a payday advance customer. The salient characteristics of payday borrowers can be a) they have little-to-no cash in the lending company b) they have got moderate incomes and c) they may be fairly severely credit constrained. So it is quite normal for somebody who's short on cash and credit to default on his/her loan. The default rate in the cash advance company is 10-20% which can be significantly higher than other areas of loan industry. According to a study conducted by Paige Skiba (Vanderbilt University Law School) and Jeremy Tobacman (University of Oxford) says that the loan defaults costs a lender about 25% of annual revenue. Since the risks are high, the lenders ought to charge higher fees to the loans to mitigate danger. For this reason, even the non-profit payday lenders charge about 250% APR.
Though the APR seems quite high, inside absolute dollar terms, the fees paid aren't that high. This is because the typical loan amount is certainly not high. As noted above, a typical payday borrower has low to moderate income. The amount you borrow is thus low as well. As per the Skiba-Tobacman study an average loan size is $283 as well as the median is $269. So a mean interest charge is $42.45 for 2 weeks. To run a retail payday operation, a store front is needed - thus the rent and operation cost. Employees have to be hired to operate the operation - employment costs. Given the larger costs of running the business enterprise, lenders say the higher fees are justified.
A typical pay day loan borrower is at the reduced end with the socio-economic ladder. Thus, from a profitability perspective, he/she is not a high priority for the banks to compete for his or her business. Also, the finance challenges made them pariah for that credit card banks. So, there usually are not many avenues left because of these low income families in order to meet their temporary financing needs. Payday lenders are here to fill this gap in the credit industry.
To conclude, despite the larger costs for customers, the payday lenders do fill a need within the society. Some stronger consumer protection regulations will help protect low income consumers from stepping into a debt pit.