Now that banks have stopped their rampant lending to consumers what should we expect next? Well let’s not be surprised if we see an increase in payday loan or title loan activity. A payday loan is an unsecured, short-term cash advance until your payday.
Payday loans are typically hyped with payday lenders saying things like:
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So why will payday loan activity increase? Well just because banks stop or slow down lending it does not mean that the obligations of consumers stops. And in the absence of first level lenders, consumers in need will turn to Back Street lenders like payday loan shops, pawnshops, and check cashing joints.
These financial service companies are typically maligned by Main Street lenders but no matter what you think a payday loan outfit does serve a purpose. Granted, that purpose might be to be there to lend when others won’t, that does not mean that the need does not exist for the consumer to borrow funds for a short period of time.
One thing that you’ll never see in the payday loan world are collateralized debt obligations (CDO), special investment vehicles (SIV) or a subprime meltdown. It could easily be argued in light of recent banking and investment house failures that payday lenders behave in a more prudent fashion.
Some states and localities are trying to shut down payday loan providers. If they are successful the only thing that will happen is that the subprime segment of the population that typically uses payday loan shops will not have them to turn to when their banks have forsaken them.
Payday loan providers would not exist unless there was a need, a desire and a customer base that was not otherwise served. Granted that customer base is closer to the poverty line than Main Street lenders would touch but just because the clientele is less credit proper does not eliminate their need for quick access to cash.
Can payday loans be abused, yes. Can mortgages be abused, yes. Can a payday loan be expensive, yes. Can a credit card charge high fees and interest, you bet.
Eliminating the payday loan does not eliminate the underlying reasons why a segment of the population uses payday loans. In fact, the elimination of payday lenders may simply lead that same group of consumers to use criminally based lenders, and I’m not talking Bear Stearns.
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