Payday loans are a form of credit that can be very expensive, due to the fixed costs associated with making the loan decision and the physical infrastructure required. Jeannette Bennett, a senior specialist in economic education, explains that these loans are often used by 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”, which can create a debt cycle. Personal loans are normally for larger amounts of money than payday loans, but you will have much more time to repay this money.
Credit card default rates are also around 6%, but the interest rate on a credit card rarely exceeds 29%, unlike payday loans which typically charge an APR of 400% or more. 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. Payday lenders often operate out of stores, but there is also a new class of loan operator that uses the Internet. These are usually loan drafts: rollover extensions or back-to-back transaction loans in which the borrower 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% of borrowers interviewed believe that the government should limit the rates charged by payday advance companies, and 72% believe that the government should limit the interest rates that lenders can charge, even if that means fewer consumers would be able to get credit. Payday lenders argue that their high interest rates are misleading, as 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. The high credit fees due to the short-term nature of these loans make them expensive compared to other types of loans.