PAYDAY LOANS

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Payday loans lending is a controversial practice and faces both legal battles and public perception challenges in nearly every state. Critics blame payday lenders for exploiting people's financial hardship for profit. Lenders target the young and the poor, particularly those near military bases and in low-income communities. Borrowers may not understand that the high interest rates are likely to trap them in a "debt-cycle", where they have to repeatedly renew the loan and pay associated fees every two weeks until they can finally save enough to pay off the principal and get out of debt. Critics point out that payday lending unfairly disadvantages the poor, compared to the middle class who pay at most 25% or so on their credit cards. In many instances the payday lender can use aggressive collection practices that include threatening criminal prosecution for writing a bad check—despite the fact that lenders routinely accept post-dated checks drawn on accounts that have insufficient funds.[3] Defenders of the higher interest rates note that processing costs for PAYDAYLOANS do not differ much from their higher-principal, longer-term counterparts such as home mortgages. They argue that conventional interest rates at these lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest, which would fail to match loan processing costs. Critics counter that payday lenders' processing costs are significantly lower than costs for mortgages and other traditional loans. Payday lenders usually look at recent pay-stubs, whereas larger-loan lenders do full credit checks and other due diligence when making a determination about the borrower's ability to pay back the loan. A study by the FDIC Center for Financial Research found that “operating costs lie in the range of advance fees” collected and that, after subtracting fixed operating costs and “unusually high rate of default losses,” PAYDAYLOANS “may not necessarily yield extraordinary profits.” Based on the annual reports of publicly traded PAYDAYLOANS companies, loan losses can average 15% or more of loan revenue. Underwriters of PAYDAY LOANS must also deal with people presenting fraudulent checks as security or making stop payments. Critics concede that some borrowers may default on the loans, but point to the industry's pace of growth as an indication of its profitability. Consumer advocates condemn the practice as a whole, regardless of its profitability, because it "takes advantage of consumers who are already hard-pressed to pay their debts".[3] Alternatives to PAYDAY LOANS Many believe that PAYDAYLOANS are the only option for consumers with bad credit, but other options do exist and most financial counselors would direct people to explore the alternatives.[4] Other options are available to most PAYDAYLOANS customers.[5]