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Consumers without Bank Accounts Turn to Payday Loans

[Apr 2, 2010.]

 

The lack of access to checking and savings accounts is one reason many Americans turn to payday loans for instant access to cash. Online payday loans can offer a quick solution to individuals who don't have bank accounts, but there are better ways to manage your money in the long-term.

Short Term Payday Loans

The best reason to use fast payday loans is that approval is usually instant. While some banks are now offering short-term loans in small amounts to some customers, the approval for these loans can sometimes take 24 hours or longer.

While quick payday loans can help some customers if they need to pay a bill fast or are facing an emergency, financial experts say it can be a problem for some households if they have too many payday loans.

One statistic says that 70% of payday loans are given to repeat users. Even if these payday loan borrowers repay the loans on time, they can be more costly than other methods of borrowing money.

Payday Loan Drawbacks

The biggest concern about easy payday loans is that the annual percentage rate on these loans can be more than 100%, compared with 20% or less for other types of credit. But regular payday loan users know that as long as they pay back the payday loan within the term of the loan (often two weeks), then they are paying interest on the loan for only a short time.

A second drawback to payday loans is that, because they are not part of the traditional financial system, instant payday loans do not build a credit score or contribute to a credit report. Even if you repay your payday loans online, these lenders do not report either a positive or a negative repayment pattern to the credit bureaus.

Payday Loan Customers

The FDIC survey shows that households without bank accounts and low-income households are the most likely to take advantage of payday loans. With 23,000 payday lenders around the country, payday loans make up a $70 billion market.

Instead of quick payday loans, some consumers rely on overdrafts from their checking accounts, which incurs high fees that average at least $27 per overdraft. Some bank customers end up with thousands of dollars of bank overdraft fees.

Payday loans, if used properly and repaid promptly, can be a less costly short-term solution to financial difficulties than a checking account overdraft. Customers with too many payday loans, or who find themselves using one payday loan to pay off another, should consider working with a non-profit credit counselor to develop a budget that can reduce the need for instant payday loans.

 

About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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