A pay day loan or otherwise known as paycheck advance or cash advances refers to a short-term loan offered to a borrower with the aim of covering their expenses until their next payday. Regulation, legislation, and restrictions in relation to pay day loans differ between countries and in the case of United States, it vary between states. In some countries, it is limited by usury laws. This law deals with the excessive and unreasonable interest rates being applied by the service companies. To protect the interest of the borrowers, some countries and states in the US apply a limit in the annual percentage rate (APR) in terms of charging interest rates for the short term loans. Although restrictions are imposed, the interest rates of payday loans are still higher compared to traditional lenders and banks because it carries a significant risk to the lender. According to a study on pay day loan, the default rate for lenders range from 10-20% and this percentage can cost them ¼ of their annual income hence the justification of a higher interest rate.
Traditional payday loan
The basic concept of a pay day loan is for a lender to provide an unsecured short term loan to the borrower at which payment is given on the next pay day. When online businesses were not yet popular, the traditional retail model of payday loan requires a borrower to go to the office to apply, secure the cash loan, and submit post-dated checks. The payment for said loan should be settled in full and is due at the next pay period. The post-dated checks are required to be submitted for security purposes only. It should indicate the total loan amount inclusive of the fees. When the next pay period arrives, the borrower should go back to the office and pay the loan in personal. If the individual fails to pay the loan, the lender will redeem the post-dated checks submitted. In cases where the checks have insufficient funds to cover your payment, the lender can file legal actions against your bounced checks. This would cost the borrower more in terms of additional fees and increased interest rates.
Online pay day loan
Now that most transactions are performed online, it became easier for borrowers to apply for pay day loan because it saves them time. Basically, the steps involved in the online processing of the loan are the following:
- Fill out of the application form – A borrower must accomplish the application form online.
- Submit the requirements – The requirements indicate that one should be a permanent citizen of the country and at least 18 years old. The documents that the lender would usually require one to submit are the paystubs and bank statements to prove that you have a job and a bank account. Some lenders would actually omit this requirement but as for franchised or individual companies, they have their own underwriting criteria.
- Verification – The accomplished application form together with the additional documents will be forwarded to the verification officer and validate the information that you have supplied in the form and documents. Once, everything is verified and there are no loopholes in your application and documents then you are approved for the loan. This is the standard pay day loan approval process.
- Transfer of money to your account – Once approved, your loan will be transferred to your account.
Internet and payday loan advertising
The internet has been used as a channel and tool for easier transaction and in advertising these pay day loan services to serve your financial needs today. Some lenders and individual companies have placed their advertisements in blog sites and social media networking sites such as Facebook, Twitter, LinkedIn, Plurk, and many more. Others use Google or Yahoo ads for more visibility. In an attempt to lure more people from borrowing, lenders or lending companies intentionally removes the display of interest rates and APR which is a violation of advertising regulations specifically in the United Kingdom (UK). The UK advertising standards clearly requires in their policy that APR should be declared in any advertisements.
Internet has really played a significant role for many of us. It is loaded with various information, applications, programs, and tools that are shared for the public. In the case of these lenders and lending companies, they have used it to their great advantage in terms of giving their business a lift and making their presence felt not only in the online world but also outside of it. As for customers or clients, one must be wary in dealing and performing transactions over the net because there are just too many scammers and predators lurking around waiting for their possible prey. Sometimes the advertisements withdraw or hide some important information from you so that you will be enticed to jump on their offer. Try to be inquisitive and take time to learn and know more about the details of what they are offering. The information that you will receive will equip you with the right knowledge you need to be able to decide whether or not you have to apply for a pay day loan.
Most articles, research papers, news, and publicity about payday lending have been a bit harsh and negative. These articles that people would read cite fees that are excessive, interest rates that are steep, and there are even claims of “cornering” individuals and families into debt cycles. Some of the research would also focus on the damages and disadvantages of the services that the payday lending companies provide. People on the other side believe that there are in fact positive benefits and that this is attested by the numerous studies revealing that the payday lending company’s availability in the community is beneficial.
Payday lending services offer no collateral credit in small amounts to high risk-borrowers. This type of loan service also provides poor households the loan that they need in cases where banks and other financial or lending institutions reject them. For the past few decades where the economy has been unstable and has created a volatile market, the democratization of credit shared a glitter of hope for individuals and families that are greatly affected by the economy specifically the mass and poor sector of the population.
Defending payday lending
Some advocates of the payday lending industry have defended the regulation of the industry against opponents who have been criticizing the service. In one of Tom Lehman’s published article entitled “In Defense of Payday lending”, he insisted that allegations against the service industry are mostly with no merit. He also said that the opponent’s views generally reflect that of elites who detest the idea of offering payday loans. Instead of seeing payday lending as a tool in creatively extending credit to poor households, critics see it the other way and it is not helping anyone at all. It would be better to suggest better alternatives rather than continue condemning and aggravating the issue.
The world economy is like riding a roller coaster as it continues to go up and down. Realizing the issue at hand and recognizing the importance of creating a solution to the burgeoning problem, payday lending services have been in place in Australia, Canada, United Kingdom and United States.
Payday lending in Australia
In Australia, payday lending services in 2008 have started to be a part of the small loans market. This type of unconventional lending is now under the control of the Uniform Consumer Credit Code or UCCC so that regulations are applied and loopholes will be monitored and avoided by the agency. The two states which include Queensland and New South Wales have levied a maximum annual percentage loan rate of 48% which is already inclusive of brokerage and fees.
Payday lending in Canada
Usury laws have defined and limited the payday lending services in Canada. According to the Criminal Code of Canada (CCC), any company or lending institution that charges an annual interest rate of above 60% is considered as a criminal case.
In line with the regulation of the payday loan industry in the provinces of Canada, the CCC was amended in 2006. It was only after three years (November 1, 2009) that the British Columbia strictly and fully enforced the Payday Loans Regulation. To ensure that the interest of the borrowers is protected, the following regulations on Short-term loans are in place:
- Capped with a maximum charge of 23% of the principal inclusive of the fees and interests;
- Borrower is given the chance to cancel the loan without any charge even if he/she has signed the agreement. However cancellation should be done only up to the 2nd day upon signing of the agreement;
- Borrower can only apply for 1 loan at a time;
- The amount of loan that a borrower can apply for should not be more than 50% of their take-home pay;
- It is a must for lenders to register under the Consumer Protection BC.
Payday lending in United Kingdom
Unlike in Canada, United Kingdom doesn’t have restrictions on the interest rates that will be charged by payday lending companies. However lending companies should declare the effective annual percentage rate and this is a law requirement. In 2009, borrowers who apply for payday loans have increased four-fold. Dollar Financial Group is the biggest and most popular lender in UK. It includes Express Finance, Money Shop, and PayDay UK (online payday lender).
Payday lending in United States
In the United States, payday lending services are regulated and legal in 37 states. The rest of the states do not recognized payday lending services as a legal means of acquiring loans and these are the following: Arizona, Arkansas, Colorado, Connecticut, Georgia, Maine, Maryland, New Hampshire, New Jersey, North Carolina, Pennsylvania, and Vermont.
The regulation of payday lending companies is governed by the law of individual states. Majority of the states apply the usury laws in limiting the charging of interest rates in payday loans in and it should not exceed the stated APR. As such, different interest rates apply depending on the state where one resides.