About Same-Day Loans

A same-day loan is for a small amount that a person might borrow while waiting for his next paycheck. The laws governing same-day loans vary among the 37 states that consider this type of loan legal. Many of them have passed legislation that limits the amount a lender can charge for these loans because of abuse. The Consumer Federation of America surveyed hundreds of same-day loan companies and found that these loans were for $200 to $2,500 and that the average rate was $25 per $1,000 borrowed for 2 weeks.

History

In 1996, California passed a law that legalized same-day loans, and similar legislation was soon passed in other states, making it one the the fastest-growing industries in the U.S. States passed these laws because legislators realized that many voters in those states were not being served by the banks due to mergers and consolidation, and that finance companies no longer were interested in making small, unsecured loans. The same-day loan industry grew by about 25 percent annually and quickly approached $50 billion.

Theories/Speculation

Proponents of same-day loans believe they serve the need for short-term cash of people who have nowhere else to turn and that the industry, in general, charges a rate of interest mirroring the risk. Others believe that these loans cater only to people on the low rung of the economic ladder and that same-day loans lead to a high rate of bankruptcy.

Size

Most same-day loans are for about $300 and they are usually paid off in full when they come due. In some cases, either the amount is larger or the customer elects, where lawful, to roll over the loan for another 2-week period or longer. Some payday lenders charge $15 per $100 borrowed, so it is up to the borrower to find a lender who charges the lowest rate.

Considerations

Because of the rate limitations some states have imposed on same-day lenders, many of them are forming partnerships with banks to avoid local laws. Same-day lenders associate with a bank in another state that is not restricted by how much interest it can charge, and for that reason, Consumers Union is urging the Federal Reserve and the Comptroller of the Currency to make it illegal for banks to make same-day loans.

Potential

During difficult economic times when people have problems making their payments, there will be increased interest in same-day loans to help them survive, not withstanding the interest they must pay. However, because the interest charged on same-day loans is so high, politicians across the country have seized upon it as an issue that resonates with the public. It is likely that many states will pass laws to curb the interest on these loans, and many companies are likely to abandon them all together. Without any regulation or legislation, though, the same-day loan business continues to grow.

Resources

• Same-day loans have increased in popularity.