Payday loan and cash advance customers are among the highest risk borrowers and interest payers in the financial industry. They are characterized by small-dollar loans, short-term loans and unsecured lending and are experiencing cash flow difficulties or are in need of quick financial assistance.
Some payday loan institutions have failed to assess and control the risks associated with their payday lending programs. The consequences of not planning there risk management practices for payday lending programs can be severe and life changing especially for repeat loan takers. However payday loans can be helpful and are not always sought with risk and high interest if used properly and paid back on time and last but not least - you find the right lender.
The risks of payday loan lending are very challenging for bankers and consumers alike and merit the continuing attention of both parties to use and deliver a fair loan service. This blog provides additional information about payday lending and how payday loans can be used responsibly.
What Are Payday Loans?
Payday loans are small short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment. Payday loans are usually priced on a fixed fee, which represents the finance charge to the borrower. Because these loans have such a short amount of time to be paid back, typically 14 - 30 days, the cost of borrowing is expressed as an annual percentage rate which can range from 300 percent to 1,000 percent, or more. A more realistic example can be seen in the paragraph below.
How Do Payday Loans Work?
In return for the small loan - usually less than $1000 - the borrower provides the lender with a check or debit authorization for the amount of the loan plus the finance charge. The lender agrees to defer the use of the check or debit card until the customer's next payday. At the next payday, the customer may redeem the check by paying the loan amount plus the finance charge, or the lender may cash the check or take a card payment either automatically or via a phone call. In some cases, the borrower may extend the loan by paying only the finance charge and setting up a payment plan to pay the outstanding loan amount.
Who Are The Borrowers?
Typical payday loan customers have cash flow difficulties and few, if any, lower-cost borrowing alternatives such as banks etc. Payday customers tend to be frequent users of payday advances, often choosing either to "roll over" their loans or to obtain additional subsequent extensions of credit either by using the same company or finding another one. Data indicates that the cash flow difficulties experienced by many payday customers are a long-term credit characteristic as opposed to a short-term temporary hardship.
A study by the Credit Research Center at Georgetown University's McDonough School of Business indicates that payday customers often rely on payday loans because they have either been turned down for other forms of credit or offered less credit than the amount for which they had applied and actually needed. The study also indicates that payday advance customers frequently have other characteristics associated with credit problems or limited credit availability, including borrowing from a pawnshop in the past five years, filing for bankruptcy in the past five years, or making payments 60 or more days late on a mortgage or consumer debt in the last year. As a result of these characteristics, payday lending is generally characterized as a form of sub prime lending.
Who Are The Lenders?
At the beginning of the 1990s, payday lending was primarily the domain of smaller independent check cashing outlets and pawnshops that offered services related to check cashing. These firms specialized in making high-priced loans to borrowers with limited access to credit.
The number of payday lenders, however, has surged in recent years as more companies have been attracted by the higher fees earned on payday loans, as well as a high level of consumer demand for a short-term, small payday loan in the USA. There are a number of fraud companies as well as companies who offer a great service. Online payday loans were introduced to save the embarrasment of customers having face to face contact with the lender and offer a much faster and hassle free service unlike a cash or pawn shop.
New payday participants include large regional or national multi-service providers of payday loans, large regional or national payday loan entities, and insured depository institutions. Although the number of known insured depository institutions involved in payday lending is small, third party payday lenders are actively seeking relationships with insured financial institutions.
Industry analysts estimate that the number of payday loan offices nationwide increased from less than 500 in the early 1990's to approximately 12,000 in 2002, with continued growth expected. The Community Financial Services Association of America, a trade group of the payday lending industry, estimated that payday lending activity in the United States during 2002 would reach about 180 million payday loans with a gross dollar volume of $45 billion and rising over the coming years.
Conclusion
Payday lending presents insured depository institutions with significant risks. To be successful in payday lending or borrowing, depository institutions must adequately identify, measure, monitor, and control the attendant risks.
Depository institutions also must ensure that adequate management expertise and the appropriate level of capitalization are available, as well as programs that ensure compliance with consumer protection laws. Conversely, the deficiencies in assessing and controlling the risks of payday lending can have serious consequences. Such deficiencies have surfaced at a number of insured institutions. Newer payday lenders such as wagedaycash.com understand the problems in the market and have designed there service to be more compliant and fees to be lower than any other payday loan institute on the web.
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