Does the Convenience of a Cash Advance Online Justify the High Price?
Few financial services have raised as many issues and concerns as getting a cash advance online, but what are the facts? The payday loan industry makes these loans available to most applicants who don’t abuse the process or default on their loan obligations, but critics have attacked the industry because of its high interest rates. However, there are two sides to every story, and most customers of these loans support the industry and appreciate the convenience of getting money fast online when faced with an emergency cash shortage.
Cash Advance Online Loans Generate Controversial Views on the High Interest Rates
Getting a cash advance online is a major convenience for people who don’t want to visit a storefront due to privacy concerns. People seem to be mostly satisfied to pay a little extra in interest rates for convenience and privacy. If lending companies aren’t making usurious profits while people willingly pay higher interest rates for short-term loans, many people don’t understand why these loans are so controversial.
The online cash advance interest rates—when they comply with state regulations—certainly exceed the interest rates of mainstream consumer lending products, but these loans are financed over longer periods of time. Companies earn huge returns on modest interest rates because they’re financed over many months or years. Short-term loans don’t have these income-generating options, so they must charge higher interest rates to earn competitive profits.
That’s why the government’s own FDIC.gov study concluded that brick-and-mortar stores offering short-term loans have enough fixed operating costs to justify their high interest rates. The same is true for online cash advance loans because these companies also need to pay administrative costs, and they have higher default rates than storefronts where lenders have personal contact with borrowers.
Online Cash Advance Loans Provide Reasonable Fees When Administrative Costs Are Considered
Several respected financial institutions have studied cash advance loans exhaustively and concluded that the overwhelming opposition of professors, clergy, politicians, journalists and consumer advocates are somewhat misguided. According to Libertystreeteconomics.newyorkfed.org, the millions of people who use these cash advance loans support having the option but often overestimate their abilities to repay loans. That means people have difficulty repaying their loans and often default on their obligations, so it’s not something that lenders what to encourage. All short-term lenders face high default rates because their loans are not collateralized, so these costs must be covered for companies just to break even.
Higher administrative expenses result from short-term loans that only last for an average of two weeks. Studies find that it’s reasonable to charge $15 to borrow $100 for two weeks even if that translates to an annual interest rate of 391 percent. Meanwhile, the lenders themselves face intense competition from storefronts, credit unions, banks, credit cards and other online lenders.
If a lender faces fixed expenses and administrative costs of $30, it becomes impossible to charge less than $2 per $100 on a two-week loan, which is what the CFPB’s 36-percent interest cap and financial reform would do.
Critics of Cash Advance Loans Raise Some Valid Issues
There are some valid issues that industry critics bring up about cash advance loans. People do become trapped in cycles of debt when they don’t manage their credit responsibly and can’t afford to repay their loans. They tend to take out more loans to make ends meet, which generates additional interest charges and fees. However, that’s no different from any mainstream loan product such as credit cards, mortgages and car loans. If fact, it’s easier to get trapped in mountains of debt from these financial products that make it almost impossible for consumers to pay off their debts.
Another common criticism is that these loans target people based on race, but most lenders target people based on their ZIP codes and average incomes in those areas. Studies have shown that anyone might choose the convenience of getting a cash advance online regardless of their income or education level. It’s true that people from lower income brackets with low credit scores are more likely to need these stopgap loans, but it’s by no means an exclusive characteristic of borrowers. In fact, one study from NCLC.org found that utility companies often work with these lending companies to establish payment centers to make it easier for low-income people to pay their utility bills.
Why Comparing a Cash Advance Loan to Other Types of Credit Is Misleading
It’s just not possible to compare a cash advance loan to mainstream credit because the product is so different, the expenses per loan are so much higher when compared to potential return and the competition is so strong. According to a report from Newsweek.com, competition offers the best solution for driving interest rates down in the future.
Spiraling fees will always be a concern, but that is a situation that can happen with any loan product. The solution here is not more regulation to try to force people to do what’s best for them but better education on how to manage finances. As people learn more about financial matters and interest rates, they can make wiser decisions. There will always be exceptions if people overestimate their resources or deliberately ignore sound borrowing policies.
Business-standard.com reports that alternative lenders, mobile wallets and technological advances are changing the face of the banking industry. Unfortunately, advances in technology tend to leave poor and undereducated people even further behind in their efforts to obtain financing or handle their money wisely. However, regardless of how rich, poor or educated you are, most people are willing to pay extra for financial convenience.
Competition from pawnbrokers, alternative lenders, banks, credit unions and other short-term lenders should ultimately be good for consumers. Allowing free markets to determine prices and interest rates is one of the tenets of modern business, and cash advances online are just one of the dizzying array of emerging alternative financial products for consumers, but it’s one that enjoys astonishing grass roots support or working American families.
Getting a Cash Advance Loan Is Easy but Requires Careful Thought
Regardless of whether you can get any kind of cash advance loan or other type of credit, it’s critical to borrow responsibly. These cash advance loans are meant for short-term emergencies and not long-term financing. Most payday lenders are working hard to address the concerns of the CFPB and industry critics by tightening their credit policies to reduce default rates, determining whether each applicant can afford to make the required payments and reducing the number of loans made each year. Other options include offering longer loan repayment periods.
All financial products can become overwhelming when people can’t afford to repay their loans. That doesn’t mean that a person shouldn’t have the option to get an online cash advance loan when he or she really needs it and can afford to repay it.
Find out more about interest rates and how to judge whether they’re too high at the Personal Money Store.