The Awkwardness of Payday Loans
- By:F. Aldo
The term "payday loan" is probably one of the biggest contradictions of modern times. When someone says payday, you think of compensation, either monetary or material, for services you have rendered to your employer. It is something that you have earned through your hard work.
So how can there be such a thing as receiving a loan in exchange for your labor? In order to understand this paradox, one must briefly understand the history behind the payday loan industry. This may help in judging whether it is indeed a paradox or actually a convenience.
The industry has not been around very long. Their existence can be attributed in part to the stringent requirements of banks. Traditionally, banks and lending institutions would rather not be bothered by unsecured loans of anywhere from $100 to $500. So some American legislators realized that there must be a mechanism for consumers to secure these types of small loans for emergency purposes. Laws were passed creating this facility and they became the basis for the payday lenders of today.
Payday loan is essentially a cash advance. These loans were designed so that people who are suddenly faced with emergency situations can secure one regardless of their credit standing and without having to provide collateral. They are short-term in nature, which in turn formed the basis for the term "payday loan" because the idea is that you will have to pay back the loan by the next payday.
While being convenient, a potential borrower should also be aware that there is a lending fee, or interest rate to some, which is deducted from the borrowed amount. The fee is there to cover the cost of bad debts. About 26% of payday loan borrowers are unable to cover their loans, so these bad debts have to be offset.
Modern technology has also played a role in bringing payday loans to the attention of more people. There was a time when a borrower had to bring lots and lots of documents to the lending company in order for them to decide whether or not to extend a loan. Some companies may also ask that the borrower send more documents via fax. The borrower also had to wait in long lines just to secure the loan. Nowadays, borrowers can do all the transactions online.
The most visible form of payday loan now on the internet is the "faxless" or "no fax" type of application. It simply means that all the application can be done online without the need for the tons of documents to be brought personally or faxed to the lender. The speed of online applications also means that the borrower can receive a decision immediately online.
Once approved, the funds are deposited directly into the borrowers bank account. This makes applying online less cluttered and much more private.
The convenience of a payday loan can mean a lot to people caught in a sudden financial bind. It helps save them from the huge penalties for checks they issue but are not funded sufficiently, and it actually improves a bad credit score when payments are made promptly. The dynamics of this service have even been appreciated in foreign places and the result is that payday lenders are now available in England, Australia, and some parts of Asia.
The term "payday loan" itself is probably lacking in grace, but there is certainly nothing awkward about the benefits they provide.
People caught in a tight financial bind can now conveniently apply for a payday loan online regardless of good or bad credit rating. No faxing of documents and no waiting in long lines.