Introduction
Most of the time, unexpected situations necessitate adequate funds in order to cover the associated expenses. Payday loans are short-term loans with high fees and interest rates that might reach 400% per year. They are known as payday loans because the lender expects the borrower to repay the amount on their next payday. Borrowing payday loans has no strict requirements because all that is required is proof of employment and a bank account. The lender issues a check with a fourteen-day grace period. If the borrower fails to repay the loan by the end of the grace period, the payday lender deposits the check. Inability to pay the loan calls for a rollover which can get expensive (Spector 961). For this reason, some people have branded payday loans evil.
Unemployed Adults and Payday Loans
Unemployed adults, especially those who have not completed their college degrees, are the ones that end up taking payday loans. Statistics from Pew Survey have it that approximately 1 out of 20 adults make a payday loan within a particular year. As much as payday loans are displayed as short-term solutions for emergencies, the Center for Responsible Lending states that people use these loans for settling regular bills including rent and groceries thus disputes their necessity. Financial situations often push borrowers into rolling the credits over thus rocketing their final pay. The average fair interest rate for a loan should be 15% -20%, but the 36% imposed on payday loans is exploitative.
Predatory Nature of Payday Loans
According to Fulmer, an officer at a payday lending entity, payday loans are overrated as predatory means. A 400% annual rate puts it as though the loans are borrowed over the year yet they only go for 2-4 weeks. Besides, payday loans are small-dollar loans hence necessitating a hike in the fees to benefit the lender.
Borrower-Friendly Terms and Evaluating Need
The CFPB advocates for more borrower-friendly terms including lenders scrutinizing borrowers' financial profiles and limiting the number of rollovers allowed for a certain loan (Spector 961). Mark Fusaro, an economist, in his paper 'Do payday loans trap borrowers in a cycle of debts' defends payday lending stating that it does not prey on borrowers at all. Payday loans are manipulative according to cynics and worthwhile in their supporters' view.
Rollovers and the Debate
Bob De Young, a former bank regulator and finance professor from the University of Kansas, argues that the claws of payday loans revolve around the possibility of rolling over the loans severally (Elwood 22). He states that the reasons for the rollover should be used to gauge its necessity. This strategy offers a solution that favors both lenders and borrowers in that the industry keeps operating while curbing uncalled for rollovers thus reducing the probability of trapping borrowers in a cycle of debts. Payday lenders derive their earnings and profits from these rollovers. Taming the number of rollovers, therefore, reflects much lower earnings from payday lending. For this reason, the lenders have to hike the rates giving the consumers an option to determine whether or not payday loans are their appropriate money solutions. Payday lending rates are possibly overrated since humans have a habit of calculating loan interest rates more often than stipulating how much more it would cost them to let a hotel room or even an automobile. The APRs are much more skyrocketed compared to those payday lending imposes.
Susceptibility to Regulation and Economic Disempowerment
The fact that payday loans are susceptible to regulatory measures and probable closure only reflects a more significant underlying problem, which could be economic disempowerment.
Works Cited
Spector, Mary. "Taming the Beast: Payday Loans, Regulatory Efforts, and Unintended Consequences." DePaul L. Rev. 57 (2007): 961.
Elwood, Ron. "The Devil is in the Details: Is Payday Lending a Godsend, a Necessary Evil, or an Enticement into Financial Hell?" (2012): 1-50.
