Participation of mainstream banks in loan industry.
A number of intriguing issues arise for economists when analyzing payday loans. The first issue is whether these loans are a platform in which the borrowers and the lending firms transact business with the latter issuing high interest loans for short-term credit. Economists also try to figure out whether these payday loaners dupe borrowers into their deals thereby trapping them in the vicious cycle that comes with an extra cost and increased debts calling for the government’s intervention to control the situation. For centuries, the same has been discussed by a number of economists in relation to moneylending issues. Case in point is the debate whether stopping these pay lending institutions from carrying out their services or introduction of stringent rules to curtail the unimaginable profits would discourage borrowers from seeking their services hence force them to seek for financial cushioning from elsewhere thus enabling loan sharking. Due to the unprecedented high profits, there seems to be potential business interaction between conventional banks and these payday lending institutions but an unanswered question is why these banks are not engaging in these short-term high interest services. Participation of mainstream banks in this industry would be of benefit to the borrowers. Conversely, these banks have been players in the high-cost, service charge based and short-term credit business. More often than not, most Americans usually overdraw their bank accounts ending up being penalized by paying fees that are equivalent to payday loan charges and this can be viewed as a short term from the bank.
Most borrowers with small dollar credit requirements payday loans seem less costly compared to fee-based bounce protection. However, this depends on how the product is consumed by the user. For instance, an $18 charge for a $100 fortnight payday adds up to a 468% APR but if the customer requires $300 then a $54 fee is charged by the payday lender with the overdraft charge stagnating at $22 reducing the APR to 190%. Borrowers who use fee-based overdraft protection severally in month in increments not exceeding $100 end up paying stellar APRs.
