Payday Loan

What are Payday Loans?

Payday Loans are very short term loans which are estimated to be provided
of amount $500-$1000 which are due on the next pay day. You pay it on the
day when you receive your salary which is why it is known as Payday loan.
Moreover, it is also known as a type of overdraft/very short term loan. These
loans usually have a high rate of interest (Melzer and Morgan, n.d.).
You wish to receive payday loan because of uncertain events which might
arise in between the month when you do not have sufficient amount to pay
back (Mann, 2013). For example, in the middle of the month, your grocery
ended and you have to pay your kids' school fee as well Therefore, you will
take a payday loan to buy grocery which is compulsory. Another example is
payment of other credit urgently which requires instant financial solutions.
These will have to be paid later on.
If somebody is above 18, he is eligible for a payday loan. Moreover, after
applying for a payday loan, approval comes right before or within 72 hours.
This is why payday loan has become popular among people who want to
receive a loan for rainy days. Also, the requirement for payday borrower is
that the person has to be a full-time employee. Working for social
organizations or receiving unemployment benefits does not let people
become eligible for it. Another benefit is that if you are a young earner, you
will become independent and you will not have to ask family or friends for
the funds. It will make you dependent on your own self and you will be able
to manage your budget. You will learn how to match expenses and revenues
(Considering a payday loan?, 2012).

Why do banks do not provide loans to low-income people?

Banks are not providing loans to low-income people because of firstly, the
amount and high cost (DeYoung and Phillips, n.d.) and secondly, time.

Amount
Payment of payday loan is mandatory according to the agreement. A person
has signed a contract according to which he has taken operating financial
loan from banks and it has to be returned back by any means. This will be a
disadvantage for people since they may not be able to afford their assets
going away.
If your pay is not at all fixed or varies, banks will not process payday loan
further. Moreover, without a checking account, the loans cannot be
processed. Checking accounts are sometimes not availed by people with low
income.
High cost
Interest rate tends to be high in this type of loan. Usually in very short term
loans, there is high risk. People have to pay back the loan as soon as they
get the pay back, however, there is no certainty that they will be able to pay
back along with the rate of interest. The rate of interest is that one factor
which causes an extreme burden on people as they have to pay principal
amount along with its cost.
Time
Time is another factor. Low-income groups may not be certain whether there
will be a delay in their pay. Some companies delay the payments to their
employees and in other companies such as in developing areas, companies
delay up to months to pay people back.
Moreover, the amount of money to be collected may take time. Some people
will need their pay to run their house thus that can also delay the return of
principal plus interest back.
Lastly, due to a short period of time, there is a high risk of uncertainty. There
can take place certain circumstances where the person will be required to
keep his money intact and not pay back as the next pay time is far away.

Why are the regulators not investing more time in providing a solid
solution for this market?
Regulators are against payday loans and are not trying to provide solutions
for this market due to several reasons:

Firstly, there are a lot of chances of bankruptcy which is actually

happening. For example, in District of Columbia, it is estimated that
due to 1000% of the amount of interest rates, people have become
bankrupt. People cannot pay back the loans if they are in a financial
crisis even if that is because of an overdraft. People tend to become
bad debt and disturb their credit reputation to be used in the future

credit requirements as banks do check the records of people.

Secondly, illegal debt collection trend has risen. People are using
illegitimate sources of giving funds and then using those funds in other
illegal activities. Such as black money or giving that credit to someone

else who has no other option at a higher rate.

Moreover, loans which have automatic rollover can increase the
amount of debt from owners (Priestley, n.d.). For example, one loan
required on 15th of May and then another required on 30th of May.

According to (Yen, 2015), borrowers can fall into high debt rate. Sometimes
the lenders charge so much of cost and borrowers are in extreme need that
they accept whatever cost of borrowing is being charged thus creating
problems for them. Chances of bankruptcy can increase too. This is one of
the reasons why the government does not support payday loans.
Furthermore, the government is concerned about public and how they will
become bankrupt resulting in problems for the economy (Meech, 1923).
Therefore, the regulation does not promote this financial market, however; it
is popular among people (Radatz, 2004).

Should it continue as a financial market?

According to the theories above, a payday loan can be very risky especially
for those who are low-income earners. Therefore, it should be stopped. There

are lots of risks involved and rollovers which can lead to people becoming
dependent upon this financial instrument. For example, as quoted above, a
person not being able to pay off a payday debt will take debt from another
person and it will go on and on. That is why it is not feasible for everyone
(Melzer and Morgan, 2015). Also, a person even if his pay is high would be
charged a higher rate of interest due to which he can be burdened due to
debt. Consequently, a payday loan can increase bankruptcy leading to bad
effects on the economy.
Similarly, a person who is a part-time employee will not be able to avail this
benefit because of him being on an uncertain pay. Therefore, it should not
continue. According to me, it will become a habit for people as well who will
become financially stagnant. They will get into it without realizing the fact
that they will become used to it (Parrish and King, n.d.).

Conclusion:
Demands for payday loans are high but there is a lack of good product
provisions such as counselling, advice and an average rate of interest. Some
banks try to slurp all the energy from a person as they see how bad they are
financially positioned. Demand is also high from low-income earners but they
can get into trouble that is why it is not feasible for them to opt for this loan
and again, they will become habitual. Therefore, Payday loans should not
continue and the above written fact proves it.

References
Melzer, B. and Morgan, D. (n.d.). Competition and Adverse Selection in the
Small-Dollar Loan Market: Overdraft versus Payday Credit. SSRN Electronic
Journal.
Mann, R. (2013). Assessing the Optimism of Payday Loan Borrowers.
Supreme Court Economic Review, 21(1), pp.105-132.

DeYoung, R. and Phillips, R. (n.d.). Payday Loan Pricing. SSRN Electronic

Journal.
Considering a payday loan?. (2012). [Ottawa]: Financial Consumer Agency of
Canada.
Priestley, J. (n.d.). Payday Loan Rollovers and Consumer Welfare. SSRN
Electronic Journal.
Yen, H. (2015). Federal regulators plan payday loan rules to protect
borrowers. [online] PBS NewsHour. Available at:
http://www.pbs.org/newshour/rundown/regulator-plans-payday-loan-rulesprotect-borrowers/ [Accessed 8 Jun. 2016].
Melzer, B. and Morgan, D. (2015). Competition in a consumer loan market:
Payday loans and overdraft credit. Journal of Financial Intermediation, 24(1),
pp.25-44.
Meech, S. (1923). Financing Expansion at the Peak of the Cycle by Short Term
Loans. University Journal of Business, 1(2), p.221.
Radatz, C. (2004). Regulation of payday loan providers. [Madison, Wis.?]:
Wisconsin Legislative Reference Bureau.
Parrish, L. and King, U. (n.d.). Phantom Demand: Short-term Due Date
Generates Need for Repeat Payday Loans. SSRN Electronic Journal.