Maxlend Payday loans in the United States

Main article: Payday loan

A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a small, short-term unsecured loan, "regardless of whether repayment of loans is linked to a borrower's payday."^[1][2][3] The loans are also sometimes referred to as "cash advances," though that term can also refer to cash provided against a prearranged line of credit such as acredit card. Payday advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries and, within the United States, between different states.^[4]

To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, and some have very few restrictions on payday lenders. In the United States, the rates of these loans were formerly restricted in most states by the Uniform Small Loan Laws (USLL),^[5][6] with 36%-40% APR generally the norm

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Competition and Alternatives

Payday lenders get competition from credit unions, banks, and major financial institutions, which fund the Center for Responsible Lending, a non-profit that fights against payday loans.^[37]

Tech companies such as PayActiv, FlexWage, Activehours, Clearbanc, and Even are beginning to provide alternatives to traditional payday loans. PayActive provides a service to employers that allows workers to immediately receive earned income for a fee. Uber and Lyft offer Instant Pay and Express Pay for their drivers.^[48]

The website NerdWallet helps redirect potential payday borrowers to non-profit organizations with lower interest rates or to government organizations that provide short-term assistance. Its revenue comes from commissions on credit cards and other financial services that are also offered on the site.^[49]

The social institution of lending to trusted friends and relatives can involve embarrassment for the borrower. The impersonal nature of a payday loan is a way to avoid this embarrassment. Tim Lohrentz, the program manager of the Insight Center for Community Economic Development, suggested that it might be best to save a lot of money instead of trying to avoid embarrassment.^[50]

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Economic Effects[edit]

While designed to provide consumers with emergency liquidity, payday loans divert money away from consumer spending and towards paying interest rates. Some major banks offer payday loans with interest rates of 225 to 300 percent, while storefront and online payday lenders charge rates of 200 to 500 percent. Online loans are predicted to account for 60% of payday loans by 2016. In 2011, $774 million of consumer spending was lost to repaying payday loans and $169 million was lost to 56,230 bankruptcies related to payday loans. Additionally, 14,000 jobs were lost. By 2013, twelve million people were taking out a payday loan each year. On average, each borrower is supplied with $375 in emergency cash from each payday loan and the borrower pays $520 in interest. Each borrower takes out an average of eight of these loans in a year. In 2011, over a third of bank customers took out more than 20 payday loans.^[50]

Besides putting people into debt, payday loans can also help borrowers reduce their debts. Borrowers can use payday loans to pay off more expensive late fees on their bills andoverdraft fees on their checking accounts.^[37]

Although borrowers typically have payday loan debt for much longer than the loan's advertised two-week period, averaging about 200 days of debt, most borrowers have an accurate idea of when they will have paid off their loans. About 60% of borrowers pay off their loans within two weeks of the days they predict.^[37]

When interest rates on payday loans were capped to 150% in Oregon, causing a mass exit from the industry and preventing borrowers from taking out payday loans, there was a negative effect with bank overdrafts, late bills, and employment. The effect is in the opposite direction for military personnel. Job performance and military readiness declines with increasing access to payday loans.^[37]

Criticism[edit]

Demographics[edit]

Income Distribution of Payday Borrowers[51]
Under $15k	9%
$15k to under $25k	11%
$25k to under $30k	8%
$30k to under $40k	8%
$40k to under $50k	5%
$50k to under $75k	4%
$75k to under $100k	3%
$100k and higher	1%

Payday loans are marketed towards low-income households, because they can not provide collateral in order to obtain low interest loans, so they obtain high interest rate loans. The study found payday lenders to target the young and the poor, especially those populations and low-income communities near military bases. The Consumer Financial Protection Bureau states that renters, and not homeowners, are more likely to be consumers of these loans. It also states that people who are married, disabled, separated or divorced are likely consumers.^[52] Payday loan rates are high relative to those of traditional banks and do not encourage savings or asset accumulation. This property will be exhausted in low-income groups. Many people do not know that the borrowers' higher interest rates are likely to send them into a "debt spiral" where the borrower must constantly renew.

A 2012 study by Pew Charitable research found that the majority of payday loans were taken out to bridge the gap of everyday expenses rather than for unexpected emergencies. The study found that 69% of payday loans are borrowed for recurring expenses, 16% were attributed to unexpected emergencies, 8% for special purchases, and 2% for other expenses.^[53]

Defaulted Loans[edit]

The Center for Responsible Lending found that almost half of payday loan borrowers will default on their loan within the first two years.^[54] Taking out payday loans increases the difficulty of paying the mortgage, rent, and utility bills. The possibility of increased economic difficulties leads to homelessness and delays in medical and dental care and the ability to purchase drugs. For military men, using payday loans lowers overall performance and shortens service periods. To limit the issuance of military payday loans, the 2007 Military Lending Act established an interest rate ceiling of 36% on military payday loans.^[55] A 2013 article by Dobbie and Skiba found that more than 19% of initial loans in their study ended in default. Based on this, Dobbie and Skiba claim that the payday loan market is high risk.^[56]

Cr.https://en.wikipedia.org/wiki/Payday_loans_in_the_United_States