The incredible growth of stores that offer cash advance loans has stunned legislators and consumer advocacy groups, who worry, with good reason, about the fact that people are lining up to borrow money at rates of interest of up to 500% annually. While stores that offer payday loans numbered in the few thousands as recently as 1999, they now number more than 20,000. In a few cities, there are several stores on just one block, and despite the large number of businesses that provide them, there is no competition in supplying these loans. Every store in a given town is asking the same rates as every other store.
The rates are not inexpensive. In exchange for borrowing a sum that varies from $100 to $500 for two weeks, a consumer has to repay the loan plus a fee that ranges from $10-30 for each $100 borrowed. If he or she can’t repay the loan after two weeks, the loan can usually be renewed for another two weeks, if the consumer pays the fee a second time. The short term of the loans frequently makes it difficult for consumers to pay back, and a lot of of them end up repaying the fees over and over. Or they take out another loan from another store in order to repay the first one. And yet, despite the high prices, the businesses are successful and these lenders offer billions of dollars in payday loans each and every year.
If the loans are so expensive, why are the businesses so successful? Why do so many people apply for payday loans?
The answer can be summed up in one word – convenience. Applying forbank financing could save consumers a lot of money, but bank financing and other, more formal, kinds of lending require several resources that many would-be consumers just don’t have. The lure of cash advances can be attributed to the typical requirements of the stores that offer them, which frequently require no more than these:
The borrower be a person of legal age
Have a current job that they have held for a minimum of three months
Have a checking account.
Be a United states citizen.
Have no other unpaid advances from that store (in several states, from any other store.)
That’s it. You can get a loan with no credit check. Lenders aren’t looking to see your Fico score. They do not care about other payday loans you have. They don’t care if you had a recent bankruptcy. They do not care if you have paid your Visa bill late three times in the past six months. If you meet the requirements above, they will almost certainly lend money to you, which is something that no bank will do with as little to go on as the minimum conditions that most cash advance stores require. It should be no surprise that these stores are successful; they will accept the business of just about anyone.
That business comes with a price, of course. That price is an average rate of interest of 391% annually. The success of these stores indicates that convenience and ease of use is an important consideration in borrowing money.
