Payday Loan Lenders... Friend or Foe?

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Payday Loan Lenders... Friend or Foe?
A Glimpse into the Business World of Payday Loan Lenders

From being accused of highly-aggressive predatory lending practices, to praying on low-income workers, it is no wonder why payday loan lenders have stayed out of the media and financial business world limelight. With such a negative reputation, you begin to wonder, who in their right mind would want to continue backing and funding payday loans? Are these lenders really as cut-throat and cruel as policymakers and the media making them seem? And how much profit are they actually making on these "high-interest-rate" payday advances? We want answers!

Actually the payday loan business is very similar to any other "traditional" financial/investment business, with one exception; they have immediate access to large pools of liquid assets, or cash. But based on the amount of people that use payday loans, payday loan lenders are obviously still providing a much-needed service in the marketplace, especially in our current economic situation, where access to traditional small loans or lines of credit have become nearly impossible for individuals with bad or limited credit. And even though they charge "high-interest" rates on individual short-term payday loans, their profit margins are not nearly as high as one would assume.

According to the study, "The Profitability of Payday Loans," conducted by Paige Skiba of Vanderbilt University Law School and Jeremy Tobacman from the University of Oxford published on December 10, 2007, "payday lenders have performed well on average, earning 10.1% per year." When compared to other financial investment businesses, this is on par for average net profitability, which tends to land anywhere from 8% to 12% annually.

Ok if they don't make an extraordinary amount of profit why does it seem like they charge a ridiculous amount in interest?

Actually, their interest rates are not as high as it seems. If people use payday loans in the manner they are set-up in, as a short-term loan, it only costs approximately $15 to $30 on each $100 borrowed or 15% to 30 % of the total money borrowed. The reason people get into so much trouble with payday loans and end up paying over 400% in interest is due to, individuals taking out multiple payday loans at once, their inability to payback their loan on time, and continuing to extend their payback period, which in the end, equals more interest and fees for the consumer.

Another reason interest remains so high on payday advances is because a large majority of people that use payday loans never pay them back, so lenders are then forced to charge high interest rates to order to recoup costs from lost or defaulted loans and still make a profit. It is the same concept that is practiced by millions of mainstream businesses daily, for example the retail industry. One of the reasons retail prices remain high is due to shoplifting and stealing, thus the store must raise their prices on existing merchandise, in order to recoup their lost funds on stolen merchandise and still make a profit in order to survive and operate in the competitive retail marketplace.

To learn more about the payday loan industry and payday loan lenders visit The Community Financial Services Association of America (CFSA) or to read more about payday loans click here

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