Payday loans have led to a nation with mounting debt, but how do they attract their borrowers and what does the future hold?
After the recent economic downturn, it was to be expected that the nation would be recovering from it for years, even decades down the line. Today, there is a continued influence upon the economy, but it is a situation not helped by those who are preying on the financially desperate and further adding to the nation’s debt. Payday and short-term lenders have always been able to boast the appeal of quick money and without the stringent credit checks and arduous application process of your conventional loan. As such, their success and the growth of the payday loan industry comes as no surprise. What is perhaps surprising, however, is the government’s failures, at least up until this point, to do anything about it.
Payday loans offer a useful escape route for those who are in need of funds – perhaps to pay off sudden or unexpected expenses. By definition, they attract those that live payday to payday, and perhaps have a bad credit history that prevents them from borrowing money by more traditional means. The credit checks associated with regular loans are in place primarily to protect the investment of the lenders, but also prevent those who cannot afford to repay borrowed funds by denying them access to it. Payday loans, despite their smaller size (the average loan is only a few hundred dollars) have opened up that door again, allowing those who cannot afford it to borrow money and continue to do so.
In a recent study, it was discovered that around half of payday loans are made by those that end up extending or “rolling over” on the loan many times and end up paying much more than figures suggest in fees. The study also showed that around four in five of these loans are extended, costing the average payday borrower a huge amount more than lenders would have us believe. Desperate borrowers are therefore being lured into a cycle that will see them continue to pile up debt that they cannot afford to pay off. Fortunately, help is around the corner in a series of strict new regulations to be imposed upon payday lenders this year. These rules will limit the profit that a lender can make, and are designed to ensure that less borrowers will fall into the trap.