Payday Loans: Federal Reserve Shows No Truth to the "Debt Trap" Hypothesis

Payday Loans: Federal Reserve Shows No Truth to the "Debt Trap" Hypothesis-Image via Wikipedia

Due mostly to new credit and overdraft restrictions, and also the creation of the consumer financial protection bureau (CFPB), the result is restricted access to credit for working and middle class and small businesses.  But with restricted access to credit the demand does not diminish, leaving many Americans short on cash and with few or no options.  And when faced with more expensive alternatives such as bounced check fees, or a necessary car repair, many Americans are left exploring options such as an online payday loan or title loan for the first time.

Misconceptions About Payday Loans

“The APR is too high”:  Many articles attack the payday lending industry for charging up to 600% APR on loans.  Yet they fail to mention that 600% APR on a 2-week $100 loan only equals to $20, much less than the average overdraft fee.  Because online payday lenders approve customers with bad credit, the default rates are higher than traditional loans.  Also, many States charge lenders to maintain a State database of lender information on top of license and business fees.   Because of these costs, and the short term of the loan, the APR % seems inflated.  In reality, the $15-$20 per $100 lending fee is necessary in order to run a lending business.

“Payday advance loans will catch you in a debt trap”: A 2007 study by the Federal Reserve board shows that there is no truth to the “debt trap” hypothesis.   Payday loans are meant to provide responsible adults with an easy to understand credit option when needed.   When used responsibly, meaning taking only one at a time and paying off on time, payday loans are a great alternative to paying more expensive bounced check fees or damaging a customer’s credit rating.

“Instant payday loans target the unbanked”:  Simply un-true.  To qualify for a loan, an applicant must have a checking account and proof of employment.

“Payday loans are complicated”:  There is not a more transparent and simpler loan product available.  Lenders display the APR% on the wall in large print in every location, and every detail of the loan is disclosed completely.

“A traditional loan is a better alternative”:  Banks and credit unions requirement a higher credit score to approve potential applicants for a loan, where payday loans are meant to provide a credit option to those with bad credit and a job.  Also, most banks or credit unions do not offer short-term loan options when a customer is short on cash for just a few weeks.

The truth about payday loans online:  There are different financial solutions for different financial problems.  Payday loans are a great option for anyone with a job and a bank account that needs a little cash until payday.

CONTACT: Emily Floyd, +1-213-674-2330 of Solomon Finance

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