Since its inception, the idea of payday loans has been a controversial subject. Also called check cashing, payroll advance or deferred deposit, these loans were designed as short-term, high interest loans, which are intended as a last resort for those who find themselves in a financial bind.
Payday loans started appearing in the 1920s as check cashing stores when many companies began paying employees with checks rather than cash. The business found success for two reasons: banks were not interested in encouraging low-income people to become customers, and during the Depression people lacked confidence in banks. Over time these businesses were forced to diversify and began to provide salary advances among their services.
Payday loans are small, non-secured loans, maxing out at between $500 and $1000. They have short terms and must be paid back quickly, usually within 14 days. As with other loans, payday loans are government-regulated, with specific usury laws that define permissible lending terms and rates. The borrower writes a post dated check or provides debit authorization for the amount of the loan plus a fixed dollar finance fee and the lender advances the money. When the loan period is up, the lending company either deposits the check or debits the borrower's account.
Payday loans are a viable choice for those in a financial emergency with no other options. These loans usually don't require a credit check, access to credit cards or a savings account, thus they are easy for people with poor financial standing to obtain. Although not illegal, payday loans employ lending practices that impact vulnerable members of society.
Consumer advocate groups from across the United States have mentioned that the high cost of payday loans often leads consumers down the path to bankruptcy. Other arguments are that the companies target specific demographics. The recently formed Center for Responsible Lending accused payday lending companies of preying on the "unbanked," those who are outside of the financial mainstream. Payday lending companies make millions of dollars from the lowest income earners.
Payday loans are much more expensive than other types of loans. It is important to settle the loan by the maturation date. The average annual percentage rate on a payday loan is about 400 percent, but often is as high as 5,000 percent, compared to a standard credit card APR of 12 percent. Furthermore, many payday lending companies are deceptive in the information that they disclose to customers. It is difficult for consumers to defend themselves legally, as the payday lenders often find loopholes or form associations with banks to remove themselves from the jurisdiction of payday lenders.