The Current State of Payday Loans in America

Since the start of the economic crash in 2008, one of the finance industry sectors which has been booming is that of payday lending. These short term loans are attractive to people who find it hard to get credit elsewhere, and use the funds from the payday lending company to ease them through a period of financial hardship. With a rapidly growing and developing industry, it is sometimes hard to keep track of the current situation. So what exactly is the state of payday lending in the USA today?

Increase in availability

In 1990, there were only 500 stores and offices in the whole of the USA offering payday lending, or paycheck advances as this short term finance is also known. Today, there are over 22,000 and this number is growing all the time. In 1990 the internet did not exist, but today a huge percentage of Americans are online and use the internet as their first port of call when arranging a payday loan.

Bad debt, bad risk

The growth of payday lending is directly related to the lack of availability of credit from banks or on credit cards and other traditional sources. As a response to the problems caused by bad debt which led to the collapse of financial institutions across the world, banks have tightened up their lending criteria, making it impossible for people on low incomes, who have poor credit history or who are self-employed to get credit. Payday lending companies will lend to these sorts of customers, even though they are perceived as high risk.

Legislation

Payday lending is not legal across the United States. In 37 states, there are few restrictions on payday lending. In the other 13, state law which caps the maximum interest rate which can be charged by a lender effectively bans the promotion of payday loans, which carry a much higher interest rate than a loan from a bank, paid back over a longer period. Other states, such as Florida and New Mexico, have legislation preventing a customer getting into financial difficulty by making it illegal for them to have more than one payday loan running at any one time. As a response to criticism over firms targeting military personnel serving overseas for loans, federal law forbids rates of over 36% APR being charged to forces customers.

Interest rates

In the states where there is no legislation about the maximum interest charges, lenders charge between 15% and 30% interest on the amount borrowed over a 14 day period. For example, a customer borrowing $100 would pay back between $115 and $130, depending on the company they borrow with. This equates to an Annual Percentage Rate (APR) of between 390% and 780%. This is considerably less than countries such as the UK, where the APR on payday loans can be as much as 2000%. Lenders justify these interest rates saying that they are covering their administration costs for setting the loan up, and for chasing customers who default on their loans.