Payday Loan

 

A payday loan (also called payday advance , payday loan , loan loan , small loan for dollar , short term loan or cash advance ) is a small, short term loan without guarantee “regardless of whether repayment of loans is linked to the borrower’s payment.” [1] [2] [3] Loans are sometimes referred to as ” cash advances ” although this term can also refer to cash against a pre-arranged credit line such as a credit card. Prepaid loans are based on a consumer who has previous payroll and employment records. The legislation on payday loans varies widely between different countries, and in federal systems, between different states or provinces.

 

To prevent usury (unreasonable and excessive interest rates), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions prohibit daily lending in full, and some impose few restrictions on payday lenders. In the United States, the rates of these loans were constrained in most states under the USLL, [4] [5] with a generally 36-40% rule.

 

There are many different ways to calculate the annual percentage rate of the loan. Depending on the method that is used, the calculated price may vary significantly. For example, for a $ 15 payday loan worth $ 100 for 14 days, it could be (from the borrower’s point of view) anywhere from 391% to 3733%. [6]

 

Although some have indicated that these loans involve significant risk to the lender, [7] [8] these loans have proved to involve no long-term risk to the lender from other forms of credit. [9] [10] [11] These studies appear to be confirmed by the US Securities and Exchange Commission at least one deposit from the lenders, which indicates a discount rate of 3.2%. [12]

 

Loan process

Loan process

The basic loan process involves a lender providing an unsecured short-term loan repayable on the next payday of the borrower. Typically, some verification of work or income is included (by paying seed and bank statements), although according to one source, some payday lenders do not check income or manage credit checks. [13] Individual companies and franchises have their own IPO criteria.

 

In the traditional retail model, borrowers visit a payday loan store and secure a small cash loan, paying the full amount owed in the next paycheck to the borrower. The borrower writes a dated inspection to the lender with the full amount of the loan plus fees. On the maturity date , the borrower is expected to return to the store to repay the loan personally. If the borrower does not repay the loan personally, the lender can replace the check. If the account is short on money to cover the check, the borrower may now face a rebate check from his bank plus loan costs, and the loan may incur additional charges or increase the interest rate (or both) as a result of non-payment.

 

In the latest innovation in online payday loans, consumers complete the online loan application (or in some cases by fax , especially when the documents are required) and then transfer funds directly to the borrower’s account, repayment of the loan and / or financing fees The next payday is automatically withdrawn to the borrower.

 

User Demographics and Reasons for Borrowing

User Demographics and Reasons for Borrowing

According to a study by the Pew Charitable Funds , “Most payday loan borrowers [in the United States] are white females, and their age is 25 to 44 years. However, after controlling other properties, there are five groups that have higher odds of using a payday loan: those that do not have a four-year college degree; African American tenants; whose income is less than $ 40,000 per year. And those who have been separated or separated. ” Most borrowers use payday loans to cover normal living expenses over months, rather than unexpected emergencies over the course of weeks. The average borrower is indebted for five months of the year. [14]

 

This reinforces the findings of the FDIC study from 2011 that found that black and Spanish families, new immigrants, and single parents were more likely to use payday loans. In addition, the reasons for using these products were not as suggested by the payroll industry for one-time expenses, but to meet regular regular pledges. [15th]

 

A study by the Illinois Department of Financial and Professional Regulation found that the majority of borrowers on the Illinois Day Loan earn $ 30,000 or less a year. [16] The Consumer Credit Commissioner’s Office in Texas collected data on the use of the 2012 payday loan and found that refinancing was $ 2.01 billion in loan volume, compared with $ 1.08 billion in the initial loan size. The report did not include information on annual indebtedness. [17] A letter to an industry analyst argued that other studies found that consumers are improving better when payday loans are available to them. [18]Pew’s reports focused on how to improve payday lending, but not whether consumers are better off with or without high-interest loans. The demographic analysis of Pew was based on a randomized (RDD) survey of 33,576 persons, including 1,855 in payday loans. [19]

 

In another study by Gregory Ellihaussen, research department of the Federal Reserve Research and Financial Services Research Program at George Washington Business School, 41 percent earned between $ 25,000 and $ 50,000, while 39 percent said income was $ 40,000 or more. 18% have incomes below $ 25,000. [20]

 

Cash

Cash

In the United Kingdom Sarah Jane Clifton of debt jubilee campaign he said, ” austerity and low wages, and business is safe drive people to afford high – cost debt from lenders write – off just to put food on the table. We need the government to take urgent action not only to rein in lenders but also to address the cost of living crisis and reduce social protection that drives people to get loan loans in the first place. ” [21]

 

Dry money from low-income communities

Dry money from low-income communities

The family is more likely to use a payday loan if they are not involved with banks or underbank or do not have access to a conventional deposit bank account. In the US context, families that will use a payday loan are disproportionately either black or Hispanic, recent immigrants, and / or uneducated. [15] These individuals are least able to secure ordinary forms of credit with low interest rates. As payday loans impose higher interest rates than traditional banks, they have the effect of depleting the assets of low-income communities. [22] In 2013, Insight, a group of consumer rights advocates, reported that the cost of payday loans was $ 774 million annually. [23]

 

“We … test whether payday lending fits our predator definition,” a New York Federal Reserve report said. In states with higher limits on payday loans, the likelihood of declining credit for households, less educated families and uncertain households is less likely, but debt repayment is unlikely to be lost. In the absence of higher soldiers, additional credit from payday lenders does not fit our predatory definition. ” [24] The caveat is that with no payments for less than 30 days, the lender will be more than willing to carry out the loan at the end of the period when paying other fees. The report notes that payday loans are very expensive, and borrowers who take a payday loan are in an unfavorable position to compare with the lender, a reflection of the inconsistency of normal consumer lending information, where the lender must guarantee the loan to assess the creditworthiness.

 

The recent law memo summarized the justifications for the regulation of payday lending. The summary notes that while it is difficult to determine the impact on specific consumers, external parties are clearly affected by the borrower’s decision to obtain a payday loan. Most directly affected are the holders of other low-interest loans from the same borrower, which are unlikely to be repaid since the first-time income was used to pay the fees associated with the payday loan. The external costs of this product can be extended to include companies that are not cared for by cash-strapped payday clients of children and families who have less resources left by the loan. External costs alone, imposed on people who have no choice in the matter, may be sufficient justification for a stronger regulation even if they assume that the borrower himself has understood the full implications of the decision to obtain a payday loan. [25]

 

Ad practices

 

In May 2008, a charity charity credit action filed a complaint to the UK Fair Trade Office (OFT) that payday lenders were placing ads that violated ad regulations on a Facebook social networking site . The main complaint was that April was either never presented or not prominently featured, which is clearly required by UK advertising standards. [26] 27

 

In 2016, Google announced that it would block all payday loans from its systems, which are known as loans requiring payment within 60 days or (in the United States) with an annual interest rate of 36% or more. [28] 29

 

Unauthorized reproduction companies

Unauthorized reproduction companies

In August 2015, the Financial Behavior Authority (FCA) of the UK announced that there was an increase in the number of unauthorized companies, also known as “copy companies”, using the name of other original companies to provide payday loan services. Therefore, it acts as a copy of the original company, such as payday loan status now . [30] The FCA strongly advised that financial companies be audited by using the Financial Services Register before participating in any type of cash participation. [31]

 

Aggressive collection practices

Aggressive collection practices

In US law, a payday lender can only use the same industry standard set of practices used to collect other debt, especially the criteria listed under the Fair Debt Collection Practices Act (FDCPA). The latter prohibits collectors of debt from using abusive, unfair and misleading practices of debtors. These practices include communication before 8 am or after 9 pm, or calling debtors at work. [32]

 

In many cases, borrowers write a dated inspection (check with a future date) of the lender; if borrowers do not have enough money in their account on the check date, the check will bounce back. In Texas, payday lenders are prohibited from suing the borrower for theft if the check is deferred. Instead, a state payer gets his clients to write checks dated on the day the loan was granted. Customers borrow money because they do not have any money, so the lender accepts the check by knowing it will bounce back on the check date. If the borrower fails to repay on time, the lender sues the borrower for writing a hot check. [33]

 

Payday lenders will try to collect consumer obligations first as soon as payment is requested. If the internal group fails, some payday lenders may outsource debt collection or sell the debt to a third party.

 

A small percentage of payday lenders have threatened, in the past, delinquent borrowers to sue for fraudulent checks. [34] This practice is illegal in many jurisdictions and has been denounced by the American Society for Financial Services Association, the Association of Trade and Industry.

 

Payday loan pricing structure

Payday loan pricing structure

The payday lending industry argues that traditional interest rates for lower amounts in dollars and shorter terms will not be profitable. For example, a one-week US $ 100 loan (APR) of 20% ( twice a week) would generate only 38 cents of interest, which may fail to match loan processing costs. Research shows that payday loan prices have risen on average, and that such moves “are consistent with the implicit collusion facilitated by price co-ordinators.” 

 

Consumer advocates and other experts [ who? ] However, you argue that payday loans seem to be in the traditional market failure. In an ideal market of sellers and competing buyers who seek to trade in a rational way, prices fluctuate based on market capacity. Payday lenders have no incentive to price their loans competitively because loans are not able to obtain a patent. Thus, if the lender chooses to innovate and reduces the cost to the borrowers in order to obtain a larger share of the market, the competing lenders will do the same immediately, eliminating the effect. For this reason, among other things, all lenders in the pay market receive fees or approximates the maximum fees and rates allowed under domestic law.

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