Cash Advances: Why The Growing Demand [Payday Loan]
November 13, 2007, 18:14:38

According to the Community Financial Services Association of America, payday lending is more lucrative than ever. Payday lenders amass $40 billion in annual business, and have more than 22,000 outlets in the U.S. alone. Considering that payday lending is a relatively new service, one has to wonder: Why the growing demand?

Payday loans, or cash advances, are short-term loans issued to borrowers. The sums are usually low, and the attached fees can be quite high. The typical duration for a payday loan is two weeks. At that time, the lender deposits a post-dated check from the borrower to cover the loan amount plus fees.

There are several reasons why payday loans are growing in popularity. One out of four Americans has a poor credit score. Bad credit can stand in the way of traditional bank loans. Payday lenders may or may not check a borrower’s credit history. Even if they do, bad credit will not stop them from lending to most applicants; the fees will just be higher.

Most payday loan outlets are located in under-privileged neighborhoods. Their local customers tend to have low-paying jobs. While the cost of living has skyrocketed, wages for American workers have remained about the same for the past decade. Affordable medical benefits are hard to come by, too. This means that more uninsured low- and middle-income workers are finding themselves in situations where they need fast cash to pay for medical emergencies. Payday loans seem like an easy, readily available option to those in need.

Repeat borrowers make up a huge portion of the growing demand for cash advances. ___ percent of those seeking payday loans fall into the category of ‘chronic’ borrowers. That is, borrowers who dig a financial hole for themselves by borrowing against one paycheck, then having to borrow again when their next paycheck comes up short from fees, interest, and loan repayment.

Finally, as our culture moves toward the lure of easy credit and the need for instant gratification, more people are borrowing money than ever before to purchase items they want or think they need. Folks who need new furniture, new cars, or a new place to live often turn to cash advance lenders to fill in their financial gaps.

Payday Loans make up a $40 billion financial industry. Like many options for borrowers with bad credit or no credit, cash advances are relatively easy to obtain. And, like other sub-prime options, they are also easy to abuse. When used in the way they were intended to be used, they can be life-savers – i.e., short-term loans in emergency situations. But borrowers who find themselves stuck in a cycle, turning over every paycheck to lenders and then borrowing more, need to investigate the spending habits that got them in debt in the first place. Without changing those behaviors, borrowers are likely to stay on a financial downward spiral.

Some banks and credit unions are offering low-interest, short-term loans to compete with cash advances, but they don’t yet have the enthusiastic response that traditional lenders were hoping for. Without a doubt, payday loans have been in demand, and will be for a long time yet.

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