Payday lenders are often targeted as an institution that preys on low income communities, but when compared to some practices by traditional lenders, payday loans can be a reasonable alternative.
Costa Mesa, CA -- (ReleaseWire) -- 10/20/2010 -- Some critics liken payday lenders to modern day loan sharks, but when compared to other types of short term loan fees like bounced checks, credit card late fees and utility bill late fees, payday loans were shown to be the least expensive of the bunch. The cash advance industry has very negative reputation, and many lenders believe that this is because the users of their service are primarily low income families. Lenders often defend their business as a service that is needed in poor communities because extra cash is often needed between paychecks. They believe that if their services are used as intended in times of emergency or for monthly bills, many of the downsides associated with payday loans can be avoided.
Some payday lenders feel like regulation of the industry is needed to stop certain companies from charging high fees and hiding loan terms. They also feel like policy makers shouldn't throw out the entire industry because it is a service that is needed in areas where the population does not have extra cash to spare between paychecks. If the interest rate is capped and consumers are stopped from taking out multiple loans at the same time, negative aspects of these high interest loans will not be as much of a problem. The problems arise when lenders charge higher interest than they are legally allowed and aren't held accountable for ignoring the laws.
Credit card companies have escaped much of the criticism for overcharging consumers. Card companies can charge up to 600% interest for late fees, but aren't subjected to the same scrutiny. Some lenders believe that this is because the people who most often use credit cards aren't traditionally low income households. Another type of late fee that is much more expensive compared to cash advances, but has managed to escape criticism, is the late and reconnection fees charged by utility companies. If a $100 utility bill isn't paid, there can be $50 in late fees and reconnection fees. If calculated percentage-wise, this would come out to 3-4 times the interest of a payday loan.
Many lenders feel that they are being specifically targeted by politicians. They know that there is a negative connotation surrounding these loans, and their reputation is constantly stirring up legal issues. Most lenders would like to see reforms, but also continue practicing business in a way that is profitable for themselves and fulfills the need of the community.