Why is using a payday loan a very expensive form of credit?

All we've done is cover the cost of lending the money plus the default rate. There's just no benefit in this yet.

Why is using a payday loan a very expensive form of credit?

All we've done is cover the cost of lending the money plus the default rate. There's just no benefit in this yet. All of which is why payday loans are simply very expensive. Because there are fixed costs that must be paid when making the loan decision, having the physical infrastructure to make the loan.

Personal loans are normally for much larger amounts of money than payday loans, but you will have much more time to repay this money. The Louis Fed article, Jeannette Bennett, a senior specialist in economic education, explained that the most common payday loan users include those with low incomes and higher-than-average poverty rates. If a consumer is unable to repay the loan within two weeks, they can ask the lender to “renew the loan. With the potential to create a debt cycle, it may seem that the disadvantages of using payday loans outweigh the advantages.

Because payday loans are aimed at people with financial problems, there are few borrowers who can pay off their loan at that time. By comparison, the credit card default rate, such as the payday default rate, is also about 6%, but the interest rate on a credit card rarely exceeds 29% (unlike payday loans that typically charge an APR of 400% or more). They may be the only source of loans available to people with low credit scores and those who can't get traditional loans. Lower-cost personal loans give a borrower more time to repay a loan than a payday loan, and most credit unions offer personal loans with APRs comparable to credit cards, which still charge lower rates than payday loans.

Although payday lenders often operate out of stores, a new class of loan operator uses the Internet. Usually these are loan drafts: rollover extensions or back-to-back transaction loans in which the borrower basically pays a fee for not having new money, never pays the principal owed. According to the industry-funded Georgetown Credit Research Center (CRC) study, 75 per cent of borrowers interviewed believe that the government should limit the rates charged by payday advance companies, and 72 per cent believe that the government should limit the interest rates that lenders can charge, even if that means that fewer consumers would be able to get credit. Payday lenders say your high interest rates are misleading, because if you repay your payday loan on time, you won't be charged high interest rates.

Unlike traditional loans, payday loans are not secured, meaning that the borrower doesn't need a guarantee to get one. As Bennett points out, the high credit fees due to the short-term nature of these loans make them expensive, compared to other types of loans.