We might think that this is a good direction. After all, being careful is not wrong. Well, it is not that simple. The fact that banks and traditional credit institutions don't approve credits with ease anymore allowed the short-term lenders to develop. Since the invention of capitalism, one of the basic laws of borrowing applied: shorter loans have bigger interests. In the case of payday loans or loans on a few months, the interests are huge, at least in the opinion of some. As the average American does not have another option to get money for daily expenses, the short-term loans with huge interests remain the only viable solutions.
Are the interests of short-term loans so high?
The average APR of a fast loan is 350%. This means that you will have to pay 3500$ per year if you borrow 1000$ through a payday loan for one year. This is a rough estimation, and when a person thinks about a payday loan, he or she must not think about it in terms of APR. You can't take a fast loan for a year, so why would you think about how much money you need to pay in twelve months? When a person thinks about a payday loan, he or she must think about what debts could be covered with that money. If the loan is opportune, there is no reason for you not to take it.
Are there cheaper short-term loans?
You can find companies offering such loans with 300% interest per year, but no less. It is not possible to create a product of this type with a smaller interest, because of several reasons:
- The payday lenders are looking for high profits. As long as people are interested about borrowing money with this cost, they don't need to apply smaller taxes. Only the government can impose some restrictions, but the authorities prefer to close the short term credit institutions instead of regulating those
- The risks associated are high. The loans are approved fast, in the base of a brief verification. As long as the company has only a limited number of details about the client, the possibilities of that client to "disappear" exist. When you apply for a credit at a bank, you will have to give them many documents, including details about your family and friends. A bank has numerous possibilities of getting the money back in case you can't pay, while a payday loan institution can only record you with the Credit Bureau. High risks mean high interests in the financial world, and this is why the payday loans are more expensive compared with the common bank credits.
- The loans are approved on short terms. A payday loan company can only have profit if the interests are high for the credit facilities that it offers. Even if the company is fully based online, there are taxes to be paid, employees and running costs. Those can only be covered if the payday loan company imposes high interests
What is the future of this lending industry?
Even if the government and other institutions warned consumers about the risks associated with those loans, they will surely be successful in the future. The states imposed regulations to companies that want to offer payday loans on their territory, and it seems like the market is more stable today. Many people debate about interdicting those loans for good, but it is impossible, because this activity is not illegal. As long as we can't forbid cola only because it contains artificial sugar, we can't forbid payday loans only because they are expensive.
The problem is that people take loans of this type when they don't really need them. A payday loan is useful when the cost of not having that money is higher. Maybe you need to repair your car, as it is the only method for you to get to work everyday. If the alternative is taking a cab, borrowing some money until your payday to repair your own car is a better method to solve this problem. If your child needs a new cell phone just because the old one is out of date, you can't consider this as being a reason to take a payday loan.
The payday loans industry will continue to exist. Even if new laws and regulations would be imposed, reducing the access of people to those credit facilities, this industry flourish. It is not a bad thing, especially because clients of those companies will learn how this system works. If you want to take a payday loan, it is a good idea to compare all the options that you have at your disposal, to determine if it is opportune to take the loan or not, and most importantly, to think if you can afford to pay it back. The comparison websites are great resources of this kind, as here, you will find objective and documented reviews about all the payday loans that are available in your state.