Payday loans have a bad rap. Some people consider them predatory. Some states, like Arkansas, have even made them illegal. There are thousands of articles warning people not to take out pay advances. So, why do millions of Americans get a payday loan each year? Why do people keep taking out small payday loans even after they have been warned? Ultimately, people willingly take out cash advances, because they need money and do not have other options. Most people that get a fast payday loan are intelligent people. They just need quick cash to cover an emergency expense.
American finances are commonly not as great as we would all like to think. 49% of people are living paycheck-to-paycheck. They are just trying to raise a family and make ends meet. 13 million Americans have to find a second job just to pay their bills. Even more families lack a savings for retirement, much less an emergency fund. What happens when these families find themselves in a pinch with an unexpected bill? Where should they go? They might need the funds to cover that emergency expense, or they may need to split up the cost between two paychecks.
They could try applying for a traditional bank loan or credit card. However, they might also be one of the 53% of Americans that are rejected for loans due to poor credit history. They might not have family that can, or is willing to, lend them money. For these Americans that have no other options, where do you expect them to get money? In this article, we will look at who uses payday loans and why, how loan rates are calculated, and why people have stigmas against short-term personal loans.
Who Uses Payday Loans?
As we have previously established, millions of Americans use payday loans. Over 12 million Americans each year, to be exact. Are you a visual thinker? You could take the populations of Utah, Connecticut, and Louisiana, and it would still be less than the number of people that take out a cash advance each year. A lot of people use these easy loans.
It is not just one group of people either. Most people think that payday loans prey on low-income families. In reality though, people at all different income levels use pay advances. Families with a household income of $30,000 use payday loans. Families with a household income of over $100,000 also use payday loans! Most payday borrowers have a few things in common. Their income just covers their day-to-day expenses, they do not have an emergency savings, and they have bad credit.
A lot of people also think that payday lenders target minority groups. However, this is not true. There is a lot of legislation in place to restrict lenders. According to the Equal Credit Opportunity Act though, lenders are not allowed to discriminate, and that includes in their marketing practices. Loan companies are not allowed to target one group of people over another based on their skin tone. People with many different ethnicities and races use payday loans.
Another common myth is that only young uneducated adults use payday loans. In reality, people use these easy loans at many different ages and stages in life. Young college students may take out a loan. Old couples in retirement may also use payday loans. The thing that these two groups have in common is that their income does not cover their living expenses, and they do not have an emergency fund in place. In fact, the most common age group of cash advance users are 30-55 years old. They have a stable income and job. They may have spent some time in college, or even graduated with a bachelor’s degree.
Sometimes life throws things at us that we cannot handle. It might be an emergency expense, or even just a drop in savings. Financial challenges happen to the best of us. Most of us can think of a time where we did not have the money we needed for something, and felt like we were stuck. There will always be times that we are not prepared. There will always be things that mess up our personal finances. For some people, having a pay day loan can really help during times like these.
Every day, people apply for quick cash loans because they need cash now. People with bad credit use payday loans as a last resort when they do not have other options. These payday borrowers do not qualify for other loans. They also do not have family that can provide a personal loan either. They know that if they choose a payday loan, they can avoid the risk of losing their car or home, unlike with a secured loan. Payday loans provide people a way to get fast cash in one or two business days.
There are also online payday loans that can offer these customers more benefits. Borrowers know that online loan providers, like netpayadvance.com, offer a secure and convenient process. Since everything is online, they do not have to worry about being judged by the lender. Some companies even have payday loan apps. Customers can manage their loan from the safety of their home. This is great for people that are stuck at home because they are under a shelter-in-place order or are practicing social distancing. They can stay home and get an online payday loan with no credit check.
Why Do People Use Cash Advances?
As we established earlier, most people do not have funds stashed away for emergency expenses. That is why people typically use payday advances for emergency expenses and unexpected costs. These types of expenses can look a little different for everyone. A person might use the money for a necessary repair on their house or car. They may use the funds to pay a medical bill. Some people use easy cash loans to split up a large item between two paychecks. Others use fast payday loans to avoid expensive fees like late fees or overdraft fees.
In most parts of the US, families rely on cars. They need a car to get to and from work. Not all car repairs can wait. The risk of losing their job and source of income is larger than the risk of taking out an emergency cash loan. The risk of losing their house is a bigger risk than taking out an instant cash loan. Pay advances let people keep their car, home, and job. Instant loans are meant to offer short-term relief to help a family get back on their feet and be better off financially in the long run. The same idea works with medical bills. A person might use a loan to visit the doctor for a health concern. A visit to the doctor now, can help save money, or even a life. It is a lot better than skipping an appointment because a person cannot afford it.
Sometimes life happens, and no matter how much you plan, you still need money. Consider the recent pandemic for example. Millions of families have been affected by COVID-19 one way or another. An online payday loan can be incredibly helpful during this time of need. The unemployment rate shot up to 14.7% during the pandemic. Do you know how many people had reduced hours? Do you know how many families lost one source of income? Many parents were either laid off or had to stay home with the kids since there was no form of daycare. Other people became sick, and had to stay home for two weeks, without pay! For some Americans, an emergency cash loan might have been their only source of money for a short time. There are many reasons people apply for quick cash loans.
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Why Are Personal Loan Rates So High?
There are more affordable forms of credit out there. There are collateral loans, traditional bank loans, and even credit cards. All of them usually cost less than payday loans. The reason these types of loans cost less is because they have some form of security.
Traditional bank loans and credit cards check a person’s credit history to see their creditworthiness. These lenders look at a person’s history with debt and are given a good idea of if that person will pay back the loan or not. They can easily decide to deny a person if they do not like their credit history. A collateral loan, or secured loan, also has security. If the borrower does not pay back the funds, the lender can take ownership of whatever item was put up as collateral. The borrower could lose their car or home if they do not pay back the debt. Payday lenders do not have these same security nets.
Payday lenders do not check credit, and they do not take collateral. Most providers offer payday loans with no credit check. We have already established that people who use online pay advances need cash now, and do not have a lot of options. Payday loan providers work with customers that have a higher risk of defaulting on their loan. In many cases, borrowers need money for emergency payments. Without this small loan, they could lose their house or car! Even if a payday lender has a couple accounts in collections, they still need to help provide funds to others. If payday loan places are going to continue helping others, they must stay open.
Unfortunately, instant loan companies cannot just magically reduce fees. The only way for fees to decrease is if more borrowers make on time payments. Lenders are unable to reduce fees because of the extremely high rate of default in the industry. Some companies have taken steps to try to decrease their fees. You see this with customer incentive programs. These programs let repeat customers receive reduced rates if they have good payment history. Other lending companies provide information on how to minimize loan costs.
Payday lenders are not the only financial companies that have higher rates and fees. No one is upset with credit card companies for charging 24 – 27% in APR. No one complains about ATM and maintenance fees. What about overdraft fees? Some of those fees can easily cost $33! Some banks will not even alert their customers until they have racked up multiple overdraft fees. In fact, some people get small loans in order to avoid overpriced overdraft fees. They can easily save $10-15 this way.
As for getting upset about payday loan APR, you are looking at the wrong number. APR stands for “Annual Percentage Rate”. That means that APR is meant to be calculated annually. However, short-term payday loans are repaid within a few weeks, or even a month. They are not made to be paid back over the course of a year. Online payday lenders charge a flat fee.
Why Do People Not Like Payday Loans?
Some people have only heard the warnings about payday loans. You cannot blame them. Obviously, those same people have never been in a situation where they had to get a fast payday loan. They have either had the funds, or they have had access to other forms of credit. If neither of those options were available to them, then they were at least fortunate enough to have friends and family that could help.
At the same time, these same people have not had friends come forward and admit that they have used a payday loan. Personal finances can be an uncomfortable conversation for many. It is no surprise if people keep their payday loan a secret. No one wants to admit that they need financial help. Everyday people get online pay advances, and you would never know.
When people say they are against payday lenders, they really mean that they are against funds that can help those with lower credit scores. They are against giving people access to funds that can help them. With over 12 million payday loan users each year, they are very common. It is likely that a friend, coworker, or neighbor has had to get a cash advance.
We want to be honest and mention that sometimes the loaning horror stories are true. Payday loan debt cycles are a real thing, but they are probably rarer than you think. Many people just need one instant cash loan to get back on their feet. Other people go through a short-term rough patch. Life happens, and sometimes people need help. Getting rid of payday loans gets rid of a resource that can help.
In Conclusion, Many People Need Small Payday Loans
Millions of people use payday advances because they find themselves in a difficult financial situation. They have a bill they need to pay, but they do not have the funds to cover it. Most people use quick cash loans to cover emergency expenses. Due to a high default rate in the industry, payday loan providers have to charge a higher fee. They have to charge this fee so that they can keep operating and helping others. People that have a stigma towards instant cash loans, and the people that use them, have never been in a similar situation.
Banning payday loans limits a person’s independence. Removing pay advances could be the difference between a family staying in their home or losing it. For some, online payday loans may be the only option that they have. Payday loans are essential, especially during difficult times.