Business 2 Community
By: Stacey Rudolph
September 5, 2012
We've all heard about payday loans, and why people avail them. Sure, they're useful, they're quick and they're timely. But are they really good for us? How big exactly is the payday lending industry, and how far is its reach? Are they legal, and are being monitored at all? We answer some of your questions here.
Why Payday Loan Companies Flourish
Usually payday loan companies target people who are absolutely desperate for money. They advertise in newspapers and on TV, promising easy money with minimum screening. For the desperate, average householder, it all seems like a dream come true. Payday companies try to appear attractive as well, with well-lit storefronts and friendly staff. The staff works unheard of hours so as to make funds available to any desperate soul at any hour of the day or night at exorbitant interest rates.
How Big Is The Payday Loan Industry
The payday loan industry is a multi-billion dollar business in the US, according to the Community Financial Services Association of America (CFSA). CFSA promotes laws and regulations to protect consumers, while ensuring that they're financially empowered to obtain small loans. They also ensure that responsible payday advance industry practices flourish, while establishing laws against negative loan-shark practices.
Legal payday loan companies in every locality are usually CFSA member stores. These companies offer Extended Payment Plans to consumers who are hard placed to repay their loans, at no additional fee. CFSA member stores provide a valued service to the community, considering that more than 19 million American households avail of payday loans every month.
High Fees And Interest Rates
Payday loan companies are free to hike up their interest rates and even offer multiple loan renewals. For every $100 loan, they can charge $15 to $20 as interest. The interest is this high even if the repayment is over a two-to three-week period. For each renewal, the interest goes up. According to the state Division of Finance; interests as high as 450 percent have been noted at Missouri payday loans shops.
In several state of the US, payday lenders have successfully lobbied and bought off legislators, ensuring that their interest rates are not regulated. CFSA has no voice in such States. The interest rates in these States can vary between 300 percent and 700 percent. If you're worried about mounting credit card debts going by the 15 to 20 percent interest banks charge, it's nothing compared to payday loan debts.
Backed By Huge National Banks
According to the Los Angeles Times, nearly 3 billion dollars of payday loan funds are backed by three huge banks. Banks such Chase, Wells Fargo and US Bancorp invest huge amounts of money in the payday loan business, at 300% interest. They use the funds invested with them by taxpayers for a humble 1% interest. Since the banks charge the payday loan companies 300%, it becomes necessary for the loan companies to charge higher interest rates just to break even. The good news is that some banks like Citibank have policies preventing investment in payday loan companies.