To understand this

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A payday loan is a short term loan given up against the Loan Pickup .com customer's next paycheck. Typically the fee is around $15 for $100 loan for 14 day period. Thus the loan carries an APR of 390% (15x26). The critics of which cash advance practices report that this really is usury, that the fees are excessive and unreasonably high. Critics also declare that the cash advance practice drains money from the low income community who are already short on money, thus creating additional burden about the people. Some in addition have said that this practice exploits financial hardships of low income families for profits and trap them in vicious debt cycle. So the question arises: Does the payday lending business have a place in society?
To understand this it is crucial to profile a cash advance customer. The salient characteristics of payday borrowers are a) they have got little-to-no profit the lender b) they have got moderate incomes and c) they may be fairly severely credit constrained. So it is quite normal for a person that is strapped for cash and credit to default on his/her loan. The default rate inside the pay day loan clients are 10-20% that is significantly higher than other areas of loan industry. According to a report conducted by Paige Skiba (Vanderbilt University Law School) and Jeremy Tobacman (University of Oxford) says that the loan defaults costs a lender about 25% of annual revenue. Since the risks are high, the lenders need to charge higher fees for that loans to mitigate danger. For this reason, perhaps the non-profit payday lenders charge about 250% APR.
Though the APR seems extremely high, inside absolute dollar terms, the fees paid aren't that high. This is because the conventional amount you borrow is certainly not high. As noted above, perhaps the most common payday borrower has low to moderate income. The amount of the loan is thus low as well. As per the Skiba-Tobacman study a mean loan dimensions are $283 and also the median is $269. So a mean interest charge is $42.45 for 14 days. To run a retail payday operation, an outlet front is needed - thus the rent and operation cost. Employees must be hired to run the operation - employment costs. Given the larger costs of running the business, lenders say how the higher fees are justified.
A typical pay day loan borrower reaches the low end in the socio-economic ladder. Thus, from a profitability perspective, he/she is not a high priority for that banks to compete for his or her business. Also, the finance challenges make them pariah for that credit card banks. So, there are not many avenues left of these low income families to fulfill their temporary financing needs. Payday lenders are here to fill this gap in the credit industry.
To conclude, despite the bigger costs for customers, the payday lenders do fill a need in the society. Some stronger consumer protection regulations will help protect low income consumers from engaging in a debt pit.

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