In the United States, there are more payday lending stores than there are McDonald’s or Starbucks. This only means that the payday loan market is a booming financial industry.
Every year, 2.5 million households in America use at least one payday loan each year, making it 1 out of every 5 Americans. No wonder payday loans generate approximately $9 billion in loan fees each year. In this article, we list the why’s and how’s of the payday lending market and its prevalence in our country.
- Extremely High Interest Rates
Payday loans are small-dollar short-term loans that are quickly disbursed to borrowers with barely any security to the lenders. Because of this risk, payday loans come with high interest rates.
Exactly how high depends on state regulations and the terms between lender and borrower. In America, payday loans are legal only in 36 states with interests averaging at 391 percent. If we are talking about averages, the amount loaned per person in the United States comes up to about $350. For every $100, for example, the borrower pays a fee of $15.
This means that for the $350 that you owe, you will have to pay an interest of $52.50. If every payday loan accrues this much interest, imagine multiplying that by the millions, and you can understand how the payday lending industry is worth billions of dollars.
- Supply And Demand
The high interest rate is one thing, but it would not make a difference unless people are willing to avail of the service. However, this has never been the case with short-term loans like payday loans.
As mentioned before, 2.5 million households in America obtain a cash advance at least once annually. But the truth of the matter is that most of them don’t get the loan just once. The demographics of people who take this type of loan is enormous.
This includes people between the ages of 25-49 with annual household incomes below $40,000. People who are also dependent on government support or retirement plans fall into this group. Mostly, though, these are people who live paycheck to paycheck and often find themselves having to supplement an income that cannot support their cost of living.
- They Encourage Debt Cycles
The 2014 study conducted by the Consumer Financial Protection Bureau, revealed that our of 12 million loans, 80% of loaners renew their terms within the next 14 days, sometimes repeating the process more than ten times.
This puts them in a cycle of debt that lasts them 11 months on more – meaning they continuously need to pay the interest on their initial loan which more than likely has increased over time. The average borrower will more than likely pay $520 in fees for their ability to borrow $350 within a year.
This habitual borrowing is something that payday lenders make no effort of stopping. In fact, this is how they get the bulk of their profits.
Short-term loans like payday loans are marketed to help anyone who needs fast cash for an emergency situation, but the truth is that it is used as a regular band-aid for recurring living expenses that millions of American households experience.
For this reason alone, it is no wonder why the payday lending market generates billions of dollars in profit every year. Are payday loans good or bad? The question has always been heavily debated, and the answer depends on each situation.
However, the government continues to figure out ways to integrate fairness into the short-term loaning system, and who knows if it will affect the demands. Right now though, payday loans in America continue to be popular.