PayDay Loans Criticized For High Interest But Advocates Claim Service Is Last Resort For Borrowers

As credit around the world becomes harder to get, instant payday loans are fast becoming popular outside the US. These cash advance loans have been criticized for their high interest rates, but because of their easy qualification, they are becoming popular in the UK and elsewhere.

The loans are sometimes referred to as paycheck advance or payday advance loans. The loan is intended to be very short term, but with a high rate of interest. For instance, a $1,000 loan may be taken out on a two-week term. The interest will vary from 390 percent to 780 percent (APR).

Interest Rates : The interest rate on these loans is so high that the US Defense Department (DOD) has called the payday lending practices "predatory". In October 2006 Congress passed a law that capped the interest rate to military personnel at 36% APR. By law, all loans in Canada are capped at 60 percent. The individual US States may also regulate the interest rates.

The Need For This Type of Lending: Borrowers may find themselves in a financial jam and may turn to these loans as a last resort. Although the banks and some regulatory agencies have pushed for legislation to limit these loans, they have been useful for people who can not qualify for a credit card or a regular home mortgage loan. The PayDay loan companies have become the lender of last resort.

How Do the Loans Work: These are some of the riskiest loans from the lender’s perspective. There is no collateral (other than a check) and the borrower need only fill out a check for the amount plus interest. For instance, a borrower may get a loan for $400 and then write a check for $460. The lender will hold on to the check until the due date, which is usually 2 weeks.

Are PayDay Loans Profitable?: The payday lenders argue that a high rate of interest is needed because of the high default rate. The FDIC (Federal Deposit Insurance Corporation) Center for Financial Research agrees and reports that after subtracting fixed operating costs and “unusually high rate(s) of default losses,” payday loans “may not necessarily yield extraordinary profits.”

Internet Options: Like everything else, the consumer can now purchase these loans online. In some instances the borrower may be required to fax the application along with a copy of the check. The loan can be deposited directly into the customer’s account, and the payment can be electronically withdrawn.

Warnings: There are some traps that consumers can fall into. Lenders make money every time a loan is made, so they could benefit on return business. Some borrowers find themselves taking the loan out regularly. It is important to realize that these are high interest rate loans. This is the same type of trap a user of credit cards can fall in to.

Source: http://www.bestsyndication.com