Definition of a Payday Loan
A payday loan is an amount one borrows to cover expenses until his next payday. Not all states consider payday loans legal, and their laws vary from state to state. Some have passed laws that limit the amount a lender can charge. In a survey conducted by the Consumer Federation of America, a person could borrow between $200 and $2,500, and the average rate she would pay is $25 per $100 borrowed for 14 days.
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History
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In 1996, legislators in California passed Senate Bill 1859 that legalized payday loans in that state, and similar legislation has passed in many other states. This made the payday loan business one of the fastest-growing industries in the United States. That legislation passed after legislators realized their constituents were not being served by the banks due to mergers and consolidation, and that consumer finance companies no longer were interested in making small, unsecured loans.
Identification
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Payday loans have been the subject of strong debate. Proponents of them believe they serve the need for short-term loans for people who have nowhere else to turn and that the industry, in general, charges a rate of interest commensurate with the risk .Others believe that the industry caters only to people on the low rung of the economic ladder and that payday loans lead to a high rate of bankruptcy.
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Size
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The majority of payday loans go for about a few hundred dollars, and they are paid off in total when they come due. In some cases, either the amount is larger or the customer elects, where lawful, to roll over his loan for another 2-week period or longer. Many payday lenders charge $15 per $100 borrowed, and it is up to the borrower to pay the lowest rate.
Theories/Speculation
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Because of the limitations some states have imposed on payday lenders, many of them are forming relationships with banks to avoid having to comply with the state's laws affecting payday lenders. This is especially true when a payday lender associates with a bank in another state that is not restricted by how much interest it can charge. For that reason, Consumers Union has urged the Office of the Comptroller of the Currency and the Federal Reserve to make it illegal for banks to make payday loans.
Warning
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During tough economic times when people have difficulty making their payments, more people will look to payday loans to help them survive financially. At the same time, increased bankruptcies will occur, due in large measure to the high rate of interest many people will pay for their payday loans. As the payday loan industry continues to grow, state legislators will be forced to deal with abuses by the industry along the way.
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