Payday Loans

by Joe Sinkwitz

In the early 90’s Colorado had only 12 payday loan stores, by the end of the decade, this number would grow to 188 and account for at least 20 of the licensed loans in that state. This shows that the payday loan industry is growing rapidly. In 1997, there were $42.8 million in payday loans issued in the United States.These shops are growing because the larger institutions that could service these loans chose not to because the profits are not there at the interest rates they would charge. The payday loan companies charge a flat rate that calculates to the hundreds of percentage points in APR terms. The reality is that the flat rate is normal a few tens of dollars per hundred that is due by the next payday, or a couple of weeks.These loans are both very short term, and secured by nothing except employment. This means there is a large inherent risk in these loans, and the price must be greater to account for that risk. The large banks don’t want to become involved in this type of lending because of the bad publicity involved when headlines read that they are charging 450 interest rates to low income families. The realities are that the payday loan stores are hedging their risk and offering an in demand service. In fact, in a recent survey completed by the CFSA (Community Financial Services Association, located at http://www.cfsa.net) 95 of those surveyed said they knew what they were getting into in terms of interest rates when they applied for a loan. Another large group of people surveyed (89) said that payday loan companies provided a valuable service, and the majority of the people indicated that they use payday loans anywhere from 6 to 14 times a year to avoid costly late charges when paying bills or bouncing checks.The payday loan industry is still growing and moving into more respectable areas than back in the early 90’s. There is still often a stigma that comes with the term payday loan, but this is quickly changing. The more people that use these services, and the more of these services that become available to people outside the inner city, the more legitimacy these loans will have. Currently, this is being serviced by companies on the Internet. It allows people to enjoy this service from the anonymity of their own homes. The industry is growing and changing, it is hard to see what the next decade will bring to the payday loan industry.I chose to evaluate an online payday loan store called Personal Cash Advance (located at http://www.personalcashadvance.com). This store offers login features that allow a user to store their personal information securely by logging in every time they would like to apply for a payday loan or view information about the payday loan they currently have issued. I filled out a sample application for one-hundred dollars any the payday loan was deposited into my account overnight. Because I was not in need of the money, I made the payment back right away, and the company allowed me to do so without any fees. The customer service representative I spoke to was happy to explain a lot of the facts to me and noted that most people that apply for payday loans preferred the online method as opposed to doing it in person. I can see why, because a lot of the stores in Phoenix are not in the best neighborhoods.In conclusion, internet-based stores such as Personal Cash Advance offer a valuable service to the middle-income community by issuing payday loans at comparable fees when the issue of duration is taken into account. Because payday loans are intended for weekly repayment rather than annual payment, the use of an APR (annual percentage rate) is inappropriate, which is how the media is able to exacerbate the stigma surrounding payday loans and the fees that come with them. Truly, the fees are more than reasonable and pale in comparison to other fees and consequences that come from missing bill payments or bouncing checks.

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