Why do loans from online payday loan companies have higher rates than those from banks and credit unions? The higher costs for these types of loans are derived from the extreme risk which is involved in lending to people who have a bad credit history and no collateral for back up.
Banks and credit unions will only provide loans to those who apply with good credit, fall into a certain range for wage earnings, have a valid reason for loan, and have a low debt to income ratio. Many applicants get their applications denied for failing to qualify in one or more of the requirements. Approval process for an online payday loan is quick and easy. There is no credit check which means the potential customers may have horrible credit history and still be approved for a loan. The risk involved in loaning to these customers creates the need for higher rates for such loans.
If you take 10 applicants who are approved for an online payday loan and look at them statistically, it would show that two or three of these loans will not be paid back. Since the company made the loan based on a signature only, the money lending to these kinds of customers becomes high risk ventures. Sure, someone could say that high risk brings high gain, but when you take a closer look at everything else involved from the business perspective, there are losses, those which break even, and only a few left over where money is made.
On average, an online payday loan lender will pay anywhere between$100- $200 for a “good” potential customer. It would take at least 4 repeat loans over time by this same person to return the money invested by the company. If the customer continues to take out loans, then the company will make a profit. Some reports say that predatory lending practices force borrowers into long term debt by charging extremely high annual interest rates. State regulations took care of that problem with companies who are located inside the U.S. and not tribal-based. Payday loans are not set up to be long-term loans and the higher rates applied to loans that are extended is making up for the risk factor of a business lending to customers without a positive credit history. There are zero interest rate payments if your loan is paid in full on the date selected at the time the contract is signed.
There needs to be a shared responsibility in this industry. Not only are the lenders supposed to have good lending practices, but the customer needs to understand the terms before they sign for the loan. Spotya! Online Payday Loan Lender is a responsible lender with some of the smallest fees found online. We believe that good people do have bad times with finances and with a little boost, things can get back on track. Know your financial situation before you take out a loan. Shop around and find a trustworthy company who charges less and is available to answer all your questions. Be ready to take responsibility for the contract you sign when you take out a loan so your situation does not go down hill. When used appropriately, online payday loans are a great source of fast cash to help boost a hurting budget.