The market is awash with companies that
offer advance payday loans. By
definition these loans are small amounts leant for a short period and with a
much higher than usual interest rate.
The incentive for those borrowing the money is to pay off the advance
payday loan quickly and therefore incur less costs in interest.
The market thrives off people’s need for
money to cover shortfall in their monthly finances. So, there could be a week to go before payday
and your car needs new tyres. The
advance payday loan will give you the money for a week to purchase the
all-important tyres that will keep you on the road and going to work. The job of the person borrowing the money is
to pay it back immediately they are next paid.
These payday loans are much easier to get
approval for than standard loans. The
applicant does not have to go through the rigors of a financial background
check. Most companies promise to have
the money in your account within 15 minutes.
What is in it for the company? The interest rates are often as much as
300% per annum. Therefore, within a year
you would owe three times more than you borrowed. The risk is high for the company, so the reward
has to compensate. There are also
usually penalty clauses, where you pay even more, if you do not pay back the
loan in time.
Saying all of this, the payday loan does
have its place. There are those times
when you do just need to get by to the next pay check. The simplified, no judgement system with high
interest rates does serve both parties.
The person borrowing is rescued from the difficult spot they find
themselves in and the company is rewarded with a sizeable return on the
investment made. Any comments about the
vulture-like quality of these companies, preying on the needs of the poorly
paid, are ill-founded. They do have a
place to help out in an emergency.
The danger of advance payday loans is when
you regularly take out these loans and with multiple companies. It is an increasingly simple task to get into
thousands and thousands of dollars of debt, much greater debt than your next
pay check will cover. Then, suddenly,
the astronomical interest rates really do kick in and cause major financial
hardship for the borrower.
Let’s keep this in perspective though. Just because some people misuse the service
does not mean the offer of advance pay day loans is in any way to blame. It is for the person opting into the service
to decide if they are capable of paying back the money within the time-limit
they specify. The industry is heavily
regulated and they have to be fully transparent in terms of fees, interest
rates and penalties. Therefore, if the
borrower continues down the path of borrowing when they have no means of
repaying, it should be on their own head be it.