Despite the improvement in the economy over the past couple of years, many people are still struggling financially. Even many of those with full time jobs can find themselves in a serious cash crunch. And if they have poor credit, as so many people do, they may turn to short term, high interest loans – most commonly known as payday loans – to get by. Payday lenders have been vilified by many, but perhaps a more nuanced view is in order, particularly considering the fact that new types of lending programs are springing up that bear a resemblance in some ways to payday lenders.
An increasing number of employers are realizing that living paycheck to paycheck, or constantly struggling financially, is not just a problem of the poor, the homeless, and the unemployed. It’s a reality for many supposedly middle-class workers and even some executives, too. One startup, Employee Loan Solutions, works with a Minnesota bank to offer short term loans that have an interest rate that is high at 24.9%, but still cheaper than the 36% or higher typically charged on payday loans. Other similar companies such as San Francisco’s Zerio charge the employee no interest, opting instead to assess a fee to the employer. Risk to the lender is minimized in part by having payments automatically deducted from the borrower’s paycheck over the term of the loan, up to one year. Despite these and similar companies being based upon different business models, they all serve the same purpose: to enable employers to help workers find more affordable credit.
The important feature of any loan program or product is that it has to meet the needs of the borrower. This is precisely why payday lenders have, for better or for worse, been so popular: they appeal to borrowers who need cash immediately and have poor credit.
In many people’s minds, payday and title lenders have the image of predators who exploit the hardship of people whose access to conventional credit is limited or nonexistent. Critics complain that the stratospheric interest rates and fees take advantage of people who can least afford them, and that the loans are structured in a way that often leads the borrower into a credit trap or results in the loss of assets (such as vehicles, in the case of title loans) that the borrower has little ability to replace. In response to abuses by the industry early on, the government has implemented some regulations to help protect consumers, but critics claim that the current protections are still insufficient.
What many people, including critics, overlook is the benefit that these short-term loans provide needed capital for people and businesses that would otherwise have no access to credit at all. Even small business owners who have excellent credit ratings can have a difficult time acquiring relatively small, short-term loans for their business, which can cripple or kill a struggling concern. For many of these small businesses, payday and title loans can help smooth out the company’s cash flow and allow the business to remain viable.
Beyond providing credit to individuals and businesses that would otherwise be denied, payday and title loans typically take much less time between applying and receiving the needed cash. While business loans from a traditional lender can take weeks to process and pay, the typical turnaround for a payday or title loan is 24 to 48 hours. For a business that has an immediate need for cash, the rapid turnaround can frequently offset the higher interest charged by preventing a lost opportunity or enabling the business to purchase goods or services that are imperative to the business’ growth or, in some cases, its very survival.
A payday loan may be tempting if you are in urgent need of cash, have bad or no credit, and are one of millions of people whose employer doesn’t offer loans as a job benefit. A payday loan may be a good match for you, but it is essential that you do careful research before applying. Don’t rely solely upon the payday or title lender’s advertisements. Look for actual customer feedback, and check out websites that provide objective, side-by-side comparisons of availability, terms, and actual costs of different types of loans from multiple lenders. Carefully determine which kind of loan best fits your needs and budget, and look for the lender that best matches your requirements, and for whom the total cost of your loan is lowest.
None of the above should be construed as a defense of the bad players in the industry, some of which have been very bad indeed. Fortunately they are being weeded out through stronger oversight – perhaps more so in the UK than in the US thus far, but progress is being made in America too. Just remember that no rules or regulations can offer you full protection from the bad apples. Your best protection in financial activity, as in all things, is knowledge.
A payday loan, or any other short term, high interest loan product, can be a reasonable choice if you handle it responsibly. Only borrow as much as you really need, don’t borrow more than you can afford, and make every effort to pay the loan back in time. That, of course, is exactly the way you should treat every type of loan, whether it’s a payday loan, an employee benefit loan, a car loan, or, for that matter, a loan from a friend or family member.
And while you’re working to pay back that loan, consider also working on ways to improve your financial situation so as to avoid future cash crises. Such crises can’t always be avoided, but wiser money management can make them far less likely to arise.