Payday Loans

How Do Payday Loans Companies Make Profit?

The easy and fast cash advance programs that payday loans companies offer are no doubt very popular because of the simple eligibility requirements and other lucrative features like little or no paperwork and quick approval. In fact, it should not be an exaggeration to say that payday advance loans are actually no-verification loans because lenders never check your credit score or verify your residential address or do any other sort of verification. All they want you to have is an active bank account (be it a checking account or a saving account), where they can transfer the money you are borrowing. What is more, things become more confusing when the majority of payday lenders claim that they charge very small amount of interest and fee on these loans. Considering the amount of risks these lenders take, it is obvious to wonder how they make profit for their business. The following information should help you understand the hidden secret.

Payday Loans Vs Conventional Loans

First of all, it is very important for you to understand that the cash advance programs offered by payday loans companies work differently from other conventional loans. Though the amount of interest seems to be very small in the first look (just $15 to $30), when you do all the calculations thoroughly, you will find that the actual annual percentage rate (APR) is in three digits that can range anywhere from 150% to $over 800% per annum. Conventional loans never charge such an extremely

high rate of interest; besides that, even the repayment terms offered by conventional lenders are much easier and comfortable for borrowers, such as easy monthly installments. But, in case of payday lending, even the repayment terms are not easy for the borrowers; when you borrow a payday cash advance, you have to pay it back within just a couple of weeks (on the coming pay day, when you get your monthly salary credited into your bank account). Failure to meet the due date does not only attract heavy penalty charges but you also become liable to pay additional interest on the outstanding balance at the same high rate, which eventually makes the debt picture quite horrible within a very short time. Besides all that, even the laws that regulate conventional lending fail to regulate payday loan programs. That is the reason why the chances of scams are also much higher in this form of lending. However, in the last few years, most states are now coming up with special payday loan laws, which you must be aware of. In fact, you must also keep in mind that sixteen states in the US have already banned payday loans because of its unconventional and predatory nature.

Your Bank Account Works As A Security For Payday Lenders

Though payday loans companies seemingly take a high amount of risk, it is also important for you to keep in mind that it is your bank account that works as a security for your lender. That is the reason why payday lenders prefer to issue loans to those who have a bank account, where their monthly income gets credited. This monthly income can be anything; it can be your monthly salary or a certain amount of money that gets credited into your bank account on a certain date every month, such as alimony payments. When you are issued a payday loan, you have to authorize the lender to deduct the repayment amount (principal amount plus interest and other charges) directly from your bank account on the set due date.

Overall, it should not be an exaggeration to say that the attractive features offered by payday loans companies are actually a debt trap for the borrowers. So, be very careful with your decision if you are considering borrowing a payday loan. The more informed you are about how things work, what kind of legal rights you have and what are legal requirements that payday lenders must fulfill, the better you will be able to do your research.


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