Wednesday, May 2, 2007

Payday Loans

Recently, National PayDay approached me to write a sponsored post about their company, and their industry as a whole. While the monetary compensation is small ($30, which I am donating to charity), it did provide an interesting glimpse into the lives of people dealing with the polar opposite fiduciary situation that I am.

Consider that the average FICO(a common measure of credit worthiness) is around 725. While at my FICO score of 780, lenders are breaking down my door to offer me incredible deals on loans, typical users of payday loans are probably at FICO scores of 500 and below, where a loan from any bank or credit card is unlikely. I would think people at scores of 500 have similar, if not greater, needs for cash flow compared to the average American consumer. However, since they are essentially, to borrow from the health care industry, un-lendable, a payday loan seems like an intriguing and sole last resort.

Payday loans, also known as a cash advance, in general are short-term loans ranging from $100-$500 that charge around 380-700% APR that require no credit checks. When you apply, you can get the loan the next day, but you have to pay it back, with interest and/or fees (depending on the lender's terminology) when you receive your next paycheck.

There are many critics of the payday loan industry who consider payday loans predatory, portraying the industry as preying on both the uneducated and the poor. While there is intuitive merit to this argument, the Federal Reserve recently released a report indicating it does not believe the industry can be called "predatory" because more often than not, people are managing to pay off their loans, indicating most use the loans as an emergency fund rather than a biweekly income boost.

For those with bad credit, and in desperate need of a cash infusion, payday loans can be a godsend. But if you begin to depend on them, you will fall in a debt death spiral, that would be difficult, if not impossible, to get out of.

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