Is a payday lending a useful service for customers?
People strongly disagree over whether payday lending provides a useful service for most customers. Defenders of the industry argue that payday lenders provide a form of short-term emergency liquidity insurance to people who have no better alternatives. Acknowledging that the loans appear to be outrageously expensive when stated in terms of the annual percentage rate, they argue that this is misleading. Payday advances, they explain, are intended to be very short-term loans. They also emphasize that there is a fixed cost to processing a closed-end unsecured loan of any size and, because payday loans are small, this cost is bound to be high relative to the size of the loan.
Further contributing to the high cost of the loans are the loss rates on them and the extensive portfolio monitoring that the lenders do to minimize the losses. Critics of payday lending argue that most customers do not use payday loans solely as an occasional short-term emergency source of credit. They say that instead, whatever their initial intent, many take out such loans frequently. They may borrow once to meet an unexpected emergency or a cash shortfall caused by careless budgeting. In many cases, however, when the next pay period comes they face a difficult choice. They can use their available cash to repay the loan. If they do, given their limited income available for average APR of 528 percent.
