Why Do Payday Loans Exist?
Why Do Payday Loans Exist? With everyone saying how bad they are, it’s easy to wonder why do payday loans exist? Or a better question, might be: why do they still exist? Since some states outlaw them entirely, and other states are lobbying heavily against them, it might not be long before they don’t exist at all.
Payday loans haven’t been around for an incredibly long time in the grand scheme of things, and most lenders are only a few decades old, if that. It’s a relatively new phenomenon, and one that has its fair share of criticism.
Those opposed to them say it drains low-income communities of their last bit of money, and they violate usury laws. It’s not hard to come to the conclusion that payday lenders are benefiting from the misfortune of others.
But those that support payday loans say that they provide a service that is needed but is not being met by any other industry. They say if payday loans didn’t exist, people would have nowhere else to turn.
Why Do Payday Loans Exist? Simple Supply and Demand
Payday loans couldn’t exist unless there were people demanding them. But the simple fact remains that when a new payday loan shop opens in a town, it immediately starts giving out loans. Of course this is because the companies choose their locations strategically, and open them in places where the demographics suggest that people are struggling. But the simple fact is that there’s a gap being filled here. The gap exists because banks make it too hard to borrow small sums from, and they make it impossible to borrow larger sums without any collateral.
Fear of Loss
People like to make a villain out of payday lenders, but you have to go back to the real source of the problem. Banks gouge their account holders with outrageous overdraft fees, credit card companies charge high interest rates on balances that don’t get paid off in full each month, as well as late fees, and retailers make it easy to buy things on credit that need to be paid off or they end up getting repossessed. All of this creates an innate fear in people and they will do anything to keep their lifestyle going and avoid paying fees or having their account closed. For many people, a payday loan represents a last ditch effort to keep it all afloat.
Lack of Savings
America consistently ranks as one of the worst countries in regards to savings. Since most payday loans are for less than $1000, this means that people don’t have an ounce of savings, or they’ve already spent through it. Most of these loans could be avoided if people would establish a savings account of just a few hundred dollars. That way they could loan themselves the money, and then pay back their savings account on payday. The trouble occurs when bad things happen back to back, of keep happening. This means you can spend your savings on one problem, and before you can replenish your savings account, something else comes up requiring that money.
That’s why most financial advisers recommend setting up at least 6 months of living expenses as an emergency savings account. It’s easier said than done of course, but this would be able to see you through any sort of calamity the Universe can dream up.
A Real Solution
It’s not realistic to think that payday loans will ever go away, but they will probably evolve. People likely won’t start saving money, and banks and other institutions aren’t going to get any friendlier as we go along. Payday loan reform is the best solution. There’s just no need for them to charge such high fees and interest on their loans.
There’s also no reason why they need to demand payment in full on your payday. The best way to go would be to offer small loans, with moderate interest rates, about half of what they currently charge, and allow people to pay it off in 3 monthly installments. That way they would really be providing what’s needed, and more people would probably use it, so they could make up for the lower interest with higher volume.
As it stands though, they are just kicking people while they’re down, and choosing to do business only with those desperate enough to go against their own common sense.