Why are Payday Loans so Popular?

Payday lending is everywhere these days and this rapidly growing industry has a presence not only in our local shopping areas, but online too. What is it about payday lending that is making it such a popular option not only in America but across Europe and the rest of the world too?

Credit Crunch

The first time most of us heard the term "subprime lending" was when financial institutions such as Lehman Brothers and Fannie Mae began collapsing in 2008. People who did not work in the lending industry were perhaps surprised to find out that these lenders had been offering credit to customers who had a very low income, or a history of defaulting on loan agreements in the past.

The criticism leveled at the banks as well as the overnight change in the economic situation led the lenders to rewrite their lending criteria completely, and tighten up their credit scoring systems. Customers who had previously found it easy to get a loan from their bank were now finding that due to their job, or the fact that they worked for themselves and their income was not stable, they were unable to get loans, credit cards or mortgages.

Payday lending criteria

Getting a payday loan is considerably more straightforward than applying for a standard loan. If applying over the counter at a store, the lender will ask to see either bank statements or pay slips to prove earnings, and proof of residence such as a utility bill. Online, the process is even simpler and typically no proof of earnings is required. Money can be transferred into the borrower’s bank account almost immediately and payment is typically required within 2 weeks of the loan date. People with poor credit histories often find that payday loans are the only type of credit available to them.

Benefits of payday lending

As described above, for people with poor credit records or on a low income, payday loans are an accessible source of short term credit. Repayments are made within a couple of weeks of the loan date, and the total amount paid is clearly stated upfront. Payments will not change as interest rates fluctuate. For people with a poor credit rating, taking out a payday loan and paying it back, in full within the loan period can improve their credit record and show other borrowers that they can be trusted and are perhaps a better risk for more traditional methods of credit in the future.

Disadvantages of Payday Lending

The main disadvantage of payday lending is that it is more expensive than borrowing from other sources. Interest rates are high although loans are generally offered over a very short period only. Payday lending is restricted in many states, and in these locations customers may struggle to get any form of short term credit at all. Borrowers who are unable to pay back their money when the loan matures may get additional charges from their bank, which compounds their debt problems even further.