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The Basics of Online Payday Loans

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In recent years regulators have given increasing attention to predatory practices in the payday loan business, affecting numerous storefront businesses and casting a pall over the whole industry.  That makes consumers skittish about these loans:  in general consumers today have a negative impression of the payday loan business.

However, payday loans remain a popular financial vehicle, in large part because the business model provides the only source of quick capital to many working-class families and individuals.  Unexpected expenses can come in all shapes and sizes – from an illness to a car repair to the emergency replacement of a water heater.  When those one-time expenses creep up, many families have no choice for financing except a payday loan.

The online payday loan business hasn’t been without its challenges, either:  as with any Internet-based business model, there have been enough unscrupulous lenders to create negative impressions among consumers and even to raise the attention of regulators and lawmakers.

However, the online payday loan business also accomplishes something that storefront lenders cannot do.  By amalgamating the offers from many different payday lenders, these online organizations can allow consumers to comparison shop in one location.  An individual needing a loan can calculate a payday loan % rate, view terms through various programs, and find the instrument that is going to meet their needs without taking advantage of their situation.

It’s important to remember that one of the major sources of negative attitudes toward the payday loan business is the fact that these loans carry a substantially higher interest rate than other loans.  Whereas home loans are available today with interest rates below 4%, it’s common to pay 22% or more for a payday loan – and depending on the credit of the customer, the rates can go much higher than that.

But high interest rates always accompany short-term financing arrangements for simple mathematical reasons.  With a shorter term, the lender has to charge more in order to make money off the deal in its narrow repayment window.  A longer-term loan (such as a home loan) has a much longer period in which to earn a return, allowing a lower interest rate to be used.  (However, any homeowner who has looked at his mortgage bill during the first 10 years of homeownership knows that the percentage of the bill going to pay interest is closer to 90% than 4%.)

A look at consumer perspectives on payday loans reveals that most problems occur when consumers become reliant upon them to pay their bills.  Debt should only ever be used to pay for things one can afford; it should never be used as a temporary solution to long-term financial problems.  When it is, it doesn’t matter what the interest rate is.  It is always going to lead the consumer deeper into financial crisis.

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