Facts and Fallacies About Payday Loans

?Payday loans provide credit facilities to consumers in emergency situations?

Whilst this may be true to some extent, a payday loan usually defers the inevitable from a current date to a future one. By their nature payday loans are aimed at people in financial trouble and statistics show that over 90% of payday loans are made to people in a cycle of repeat borrowing.

?Payday lenders serve middle class working families?

The payday loan industry claim to have its roots in middle class America is based on a study funded by the industry itself. The study concludes that 50% of lenders are middle income earners based on interviews with only 427 out of 5,400 lenders.

In contrast to that, business plans submitted by lenders paint a different picture altogether. These plans suggest that up to 40 million households with incomes of $25,000 or less are in need of quick loans between $50 and $300 and that this market is expected to grow substantially over the next decade. This all points to the fact that the industry is targeting lower income families on an ever increasing scale.

?Customers understand the cost of this service?

Most borrowers believe that the APR on their payday loan is in the region of 30%, which is fairly close to the credit card rate. In reality however payday loan rates are on average 13 times higher or around 400%. This gap in perception is certainly a cause for concern and prospective lenders should familiarize themselves with the terms of the loan before signing any documents.

The perception of lower interest rates is reinforced by wording in most contracts which typically state something to this effect. ?We charge $15 per $100 borrowed. Sounds like 15% to most people, but when you factor in the duration of the loan at only 8 days, the real annual rate is closer to 800%.

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