We will firstly discuss the negatives of payday lending.The rate of interest on payday loans is alarmingly high.The finance charge for the payday loan looks reasonable until it is converted to annual terms.For example, if a lender charges $100 for a one-month payday loan of $1000 then interest is being charged at an astonishing 120% per annum.The actual interest charged by the payday a lender is much higher with the annual compounded interest reaching somewhere near 3000%.This is in stark contrast to what banks charge.
Payday lending has been criticised for draining money from low income communities.Payday lending has a direct negative effect on savings and asset formation which is critical for the growth of any country.Lenders justify their high finance charges saying that the risk of default is also very high.However a survey in case of micro financing once showed that the risk of default was much less compared to bank lending.Defaults also create a difficult situation as the recovery procedures are also not much regulated.That is why some borrowers fall into the debt trap.Critics have blamed payday lenders for exploiting financial hardships for profit.This expoitation is reflected in the high rates of interest and the amount of fines and penalties imposed for defaults.
People who are for payday lending have argued that payday lending opens up a window for people requiring funds in case they have exhausted all other options.They have also argued that the high finance charge is in line with the costs particularly if you take into account the loan losses which are relatively very high.Payday lenders also argue that if they charge rates similar to banks then because of the small amount of loans they will not be able to recover the loan processing and verification and administration cost.When your urgent cash requirements would be satisfied each time then you would surely feel secure which is exactly what payday lending has done and thereby increased the household welfare.Surveys have shown that in areas where payday lending was there the crime rate was drastically low.Also payday lending contributes to the social welfare by reducing the number of drug and alcohol addicts.
We will discuss two types of payday loans here.One of them is the military payday loans with no credit check.Military personnel are a special set of people who rightfully enjoy many privileges.Checking their credit would be an insult.Moreover there is a lot of transparency even otherwise about a military personnel’s background.Sometimes the families of these personnel or they themselves might need some urgent cash between paydays and this need is catered to by payday lending in a quick and organised manner.
The second type of payday loan is the direct deposit payday loans.Direct deposit of the loan is possible in case of online payday transactions.Sometimes mailing a check to you might take some time and thus in order to transfer funds quickly the lender directly deposits the loan into your account and withdraws it on maturity date.Availing of funds does not get any faster than this.
