Payday loans are a valuable tool if used properly. They aren't found money. (Photo: flickr.com)

This is a question that all people seeking a payday loan should ask themselves. Payday lenders are like any other businessmen who are looking to make money on a commodity that is in short supply. Remember, they did not create the shortage; they are only serving people that face the same. If you stop to take a close look, you will find that most lenders are only going by the customer’s requirements. They never force a person to roll over a loan or refuse to accept repayment of money borrowed. They would be more than happy to relieve you of the burden.

It Takes Two to Shake Hands

A payday lender sets up his/her business hoping to lend money to people in need at a cost. They do so at a profitable rate, yet at the same time they do away with numerous requirements that traditional banks and institutions claim are mandatory. Payday lenders are taking a risk by lending out the money and want to get it back with interest and charges which will help them stay afloat. Consumers, on the other hand, look for the money at short notice without many hassles. They are looking for the money to cover a short term need and are willing to pay the price. Life would be so much easier if both parties stuck to their commitments. However, things do not always work that way.

Part of the Blame Lies with Consumers

Easy money is always hard to attain. Price does not matter when the need for the money is urgent. Despite the information that a reputable payday lender provides, some consumers still fail to realize that the loan has to be paid on the next payday and that the payday lender is well within his/her rights to demand the same. Such consumers may think of a payday loan as an added form of cash flow into their accounts. They pay off one loan, only to take another. Some consumers are also guilty of applying for more than one payday loan at the same time. It is only over a period of time that they realize that they are paying a lot more in terms of interest and charges. The complaints start following thereafter.

Is There a Solution to the Problem?

Applying just a little thought to the issue indicates that there is a solution. As mentioned earlier, the payday lender is in no position to enforce a loan upon the consumer. Therefore, it is up to the consumer to take stock of the situation before making an application for a loan. There are times when such a situation cannot be avoided. There are also people who have taken the money just to impress guests or friends. The consumer has to make a hard decision as to whether the loan is really required. If it is and needs to be taken, the consumer then has to think on two fronts: first the repayment and second the shortfall that they will face the next month. Rather than leave things for the last moment and get trapped into a debt situation, the consumer should start making plans to cover for the shortfall expected in the next month. Taking this one simple step will help the consumer utilize the facility that the payday lender offers and also stay out of debt in the future.

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Mention payday loans and you are likely to evoke some extreme reactions. While on one side you will hear how payday loans are a boon to the individuals and families in need, on the other side you might as well hear stories of how payday loans ‘prey’ upon those in need. The focal point amidst all this remains the payday lender. Are the payday lenders the altruists who are out to alleviate the sufferings of the poor or are they the worst facet of capitalism, whose single point agenda is to make profit at the cost of happiness of others? The answer is ‘None of these’. Let us explore and understand this curious case of payday loan lenders.

First, we need to know what exactly payday loans are and what do they do

Payday loans are short term cash advances that are made against your next monthly paycheck. They can range from anywhere between $100 to $1500. The main aim here is to provide you with enough cash to meet any urgent or otherwise important expenses, when your regular finances are unable to do so. Point to be noted here is that they are really easy and fast to obtain, so you are getting the cash you need in a matter of hours, irrespective of your credit score.

The role and risks of payday lenders

• Thus payday lenders play a very important and often overlooked role of putting the cash back in your hands whenever you need it.
• Keep in mind that the traditional financial institutions like banks would not lend money to anybody with a poor credit score. The payday lenders on the other hand take this risk of lending irrespective of the credit history and thus expose themselves to the risks of lending to the potential defaulters.
• Also unlike other loans, there is no collateral for payday loans. So basically, the only security that a payday lender has is your next paycheck!
• This would explain the so called ‘high’ interest rates on the payday loans. The payday lender is taking a huge risk and some studies indicate that the average rate of defaulters for any payday lender is upwards of 25%. Thus the ‘high’ interest rates are only meant to shield these lenders from such defaulters.
• In many states where the interest rates on payday loans were capped, most of the payday lenders have gone bankrupt.

Predators or Preys?

• Regarding the charge that the payday lenders target only the distressed, ask yourself, who would a Rolls Royce showroom target? Obviously, they target the super rich, those who can afford it. The same way payday lenders target their marketing efforts on those who need them, and the rich people often don’t need payday loans!
• Finally, in these times of recession when the economy is fighting the lack of liquidity because the regular lenders would just not lend, payday lenders could just be the saviors we need. They are injecting the liquidity back into the economy, while taking risks that the regular lenders are so unwilling to take.

While it’s true that there are a few bad apples amongst the payday loan lenders who are giving a bad name to all of the tribe, but then it’s true for any business, so it’s up to the consumer to be careful.