A payday loan refers to a small, short term cash loan which is given to
customers between paydays to help them overcome financial difficulties during
that period. Payday loans are also known as paycheck advances or cash advances
and normally limited to an amount of $1,500.
Payday loans have generated a fair amount of controversy. Critics claim that
payday loans target the young and the poor and low income communities who do not
understand the value of money. Often critics have compared payday loan lenders
to loan sharks because they levy very high interest rates on the loans. Normally
a payday loan lender charges anything from 250% onwards for the loan. When
compared to the middle class community who pay something like 25% interest on
credit cards, the young and poor of the community pay a much higher rate of
interest on payday loans and hire purchase contracts.
In contrast, proponents of payday loans argue that payday loans fill a gap
that national banks cannot fill and the cost of processing a payday loan is not
much higher than other long term high principal loans. Supporters of payday
loans further argue that the interest on a payday loan is less than the costs
that the borrower has to incur when a check bounces or pays credit cards loans
late. They argue saying that conventional interests on payday loans are not
profitable. The Federal Reserve Bank of New York’s prepared a report on payday
loans which said that these loans fill the shortage of household cash flow
between paychecks and could contribute to improved wellbeing of families who
avail payday loans. The report further added that families usually took payday
loans for urgent requirements like paying for groceries and utilities.
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