Payday Loans: Resources for Underbanked Consumers

Payday Loans: Resources for Underbanked Consumers

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In recent years, payday loans have received a lot of media attention, largely negative. These small personal loans have been criticized for their high interest rates, which have the potential to contribute to long-term debt. Some critics claim that wage advances are “predatory” because of their high annual percentage rates (APR), especially since many people who use them are already at risk of debt. Experts argue that check advances are a financial disadvantage for consumers because they have the potential to result in a downward spiral of unmanageable debt for borrowers.

Indeed, much of the criticism of wage advances does not place these useful short-term loans in the right perspective. Too often, critics do not recognize that payday advances are a valuable business resource for those who do not have access to banking. For the many people who do not use conventional banks, usually due to an unsatisfactory financial record, a check advance is a useful financial tool. In many cases, a payday loan is the only legitimate way that someone with low incomes can borrow money without risking their valuable personal property, such as a car, television or jewelry, to secure a loan. The lower-banking community uses a variety of alternative financial services (AFS), such as cash advances, as an alternative to conventional financial services that are generally out of reach. According to the Federal Deposit Insurance Corporation (FDIC), 20% of households in the U.S. They don’t have access to the bank. In other words, one in five households in the U.S. Or about 51 million adults do not use the conventional banking system. Many people who do not have bank banking services depend on cash advances as a convenient way to borrow money. In fact, more than ten million Americans use wage advances every year. Therefore, the consequences of restricting or ending these small loans should be considered before immediate legislation is passed that would deprive a significant percentage of Americans of their ability to access short-term loans.

Critics of wage advances often operate under the erroneous assumption that those who do not have access to banking will have bad financial decisions that lead to debt. Instead of allowing consumers to make their own financial decisions, these experts would prefer to eliminate these short-term loans as an option. This vision is both condescending and dangerous. The truth is that most people who use payday advances are hard workers who have no choice but to borrow money. These lower-banking consumers understand the costs associated with an unsecured loan, and are making an informed decision that is designed to provide short-term financial relief in the event of an emergency. In today’s economy, millions of Americans lack the means to handle a financial emergency through a traditional bank loan, credit card, or personal savings. These consumers benefit from wage advances and consider them a valuable financial tool.

Although lobbyists and legislators pushing for restrictions on payday loans may think they are advocating on behalf of those who do not have access to banking, these restrictions simply ignore their needs and limit their options Financial. Cash advances are a proven asset for people who cannot get credit elsewhere because of low incomes. The new York Federal Reserve Bank has conducted studies that show that when loans are not available, consumers pay more overdraft fees and are more likely to break because they often do not have other legitimate options to ask Borrowed money. According to a study by the 2007 Federal Reserve in New York, the argument that wage advances contribute to long-term debt is flawed. Instead, the study found that households tend to have worse results when prohibited:

This negative correlation reduces credit problems, contradicts the critique of the payday loan debt trap, but is consistent with the hypothesis that payday credit is preferable to substitutes like “protection” of non-funded checks Sold by credit unions and banks or pawn loans.

When those who do not have access to the bank lose access to credit in the short term, they suffer in various ways. For example, if they can’t borrow money for car repair, they might lose their job due to transportation problems. In addition, they could face high NSF rates that are much more expensive than interest in a two-week cash advance. Other unwanted consequences of the prohibition on payday loans are that those who do not have access to banking have no way of borrowing money for utility bills, which can lead to service outages and high rates of RE Connection. When used responsibly, pay advances, which will be paid on the next payday, can help those who do not have access to manage a variety of financial emergencies and avoid costly NSF and surcharges, re connection fees and other consequences Negatives of not being able to pay the unexpected expenses between the periods of payment. As the new York Federal Reserve Bank’s study indicates, a cash advance is a better alternative to a pawn loan, which not only comes with a high interest rate but also requires guarantees. Unlike pawn loans, wage advances eliminate the risk of losing valuable personal assets to secure a loan. And unlike the costly protection against money-free checks, which is often unavailable to low-income people, a payday loan offers a unique solution to avoid costly overdrafts or NSF charges, which can cost between $30 to $40 per Transac When an account is turned in uncovered.

Research shows that regulations against payday loans do more harm than good. Those who do not have access to banking services do not need protection against cash advances. In fact, the opposite happens: payday loans offer protection to the millions of people who opt out of receiving conventional banking services or cannot use them. Legislation that restricts or prohibits payday loans leaves the most vulnerable members of our society without the means to borrow money. Instead of forcing payday lenders to close their doors, legislators should promote short-term credit market innovation. Those who do not have access to banking services need more affordable short-term lending options, not less.

Payday lenders offer beneficial financial resources to consumers who do not have access to banking. Conventional banks should follow their example and offer more innovative products. This would not only benefit those who do not have access to banking, but it would also be profitable for banks. The community with lower banking services would be a valuable market for conventional banks to take advantage of. If banks offered more short-term credit options to the 51 million of US adults who do not have access to banking, it would be a mutually beneficial situation for both groups; Yet, to date, banks have been reluctant to seize this opportunity. Payday lenders have been criticized for marketing their products to those who do not have access to banking services when they actually provide them with fast and reliable financial services. Payday advances are an invaluable resource for people who do not have access to banking and have no other viable way of borrowing money.

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