The Pay Day Loan Industry By Country

A payday advance loan, otherwise known as a pay day loan, is a small dollar loan offered for a short term with little or no collateral. The practice of linking the term of the loan to the borrower’s next paycheck popularized the expression pay day loan throughout the industry and the media. A pay day loan almost always relies on the borrower having pay stubs or other evidence of employment for the period immediately preceding the loan.

The pay day loan industry began in the United States, but it has since spread to many other countries. It is very popular in the UK, and has many users in Canada and Australia as well. Legislation regarding the pay day loan industry varies a good deal between US states, and different countries approach regulation differently:

Pay Day Loan Rates In The United States

Pay day loans are legal and have regulations on the books for them in thirty-seven states. Not all of the other states ban them, but the industry does not choose to offer their products everywhere. The fees that pay day loans charge sometimes exceed yearly APR rates set by some states which have interest rate caps that do not take into account the difference between fees and interest.

Federally, The Consumer Financial Protection Bureau was given authority by the Dodd-Frank Act to regulate all pay day loan outlets. This oversight has not produced any regulation that other lenders do not have to abide by. There is an exception for pay day loan products for members of the US military which sets a rate cap of 36 percent on tax refunds and other loans to active duty service members and their families.

Pay Day Loan Rates In The United Kingdom

Pay day loan businesses are becoming very popular in the UK, with the rate of persons using the service increasing fourfold in just three years. The size of the average loan is approximately £300. The United Kingdom does not currently have any restrictions on the amount of interest that can be charged on a pay day loan, and it’s common for the amount to be expressed as a one-time fee in any case.

Pay Day Loan Rates In Australia

Queensland and New South Wales limit the maximum APR on a pay day loan to 48 percent, which must include any fees.

Pay Day Loan Rates in Canada

Like the United States, pay day loan regulation vary in Canada depending on the province. Ontario, Saskatchewan, and British Columbia impose regulations on the amount of interest a pay day loan can include.

 

The Rise Of Paydayloans

If you’re in the market for a microloan, you’ve probably seen the term payday loans everywhere in print and online. A payday loan is one type of short term loan where a borrower gets a small amount of money without offering any collateral except a pay stub or evidence of another form of regular income. The borrower normally writes a post dated check for the loan amount, including a fee, and the lender holds on to it until the term of the loan is over. Since the term of the loan is often until the next time the borrower is paid, it’s become commonly known as a payday loan. Loans of this type are sometimes called check advance loans as well.

Paydayloans Are Fairly New

Since paydayloans are a fairly new industry which sprang up in response to the tightening of credit availability after the 2008 economic downturn, and are often used by lower income working people who haven’t got access to standard credit cards or other forms of traditional credit, they’ve attracted a great deal of scrutiny from regulators, financial institutions, and academics.

Paydayloans Started In The United States

Though paydayloans are very popular in the UK, they have a longer track record in the United States. The Federal Reserve Bank of New York came to the conclusion that payday loans shouldn’t be classed as predatory loans, because even though the substantial fees on short term loans seem high when calculated as yearly APR, the evidence shows that access to these loans can actually raise welfare in households. They see relaxed credit restraints on the working class population as a possible means to improve living standards for those that need them.

Paydayloans Have Been Studied Extensively

An economics prof. from Clemson University also reported no proof that payday lending leads to an increase in bankruptcy filings, which makes it unlikely that the amount of the loans and their terms are having an adverse effect on borrowers.

Interestingly, the University of Chicago produced a study that discovered that in areas of the country hit by natural disasters, consumers were better off in areas where paydayloans were offered than those in zones where there were no payday lenders. The rate of home foreclosure was also lower. The study further found that areas served by payday lenders had fewer people seeking treatment.

How Federal Regulation Affects The Payday Loan Industry

In order to acquire payday loans by borrowing a small sum of money, generally $500 or less, the borrower shows the lender proof of employment or other steady income. The lender authorizes the amount of the loan and provides the funds as a check or cash. The borrower then provides the lender with a check in the amount of the loan plus a fee, which is postdated to reflect the term of the loan. When the term is up, the borrower either settles the debt in person, extends the term of the debt further, or the lender redeems the check. That, in a nutshell, is a payday loan.

The Credit Card Industry Changed Drastically In 2010

In 2010, the federal government put stringent new regulations on credit card issuers that affected their ability to judge default risk and charge higher interest rates accordingly. The end result of these laws was to force the credit card issuers to simply stop offering credit cards to many people. The need for small loans for people suddenly shut out of the credit card industry didn’t go away, and probably actually increased due to the concurrent economic downturn, so the popularity of payday lenders increased dramatically.

The Need Is The Same, The Methods Changed

Formerly, for example, if a working person’s car broke down suddenly, they might use a credit card to charge needed repairs so they could continue to get to work to earn a living. These thorny situations did not go away with the end of easy credit, so paydayloan businesses sprang up to meet the demand.

Payday loans Help Users Avoid Even Bigger Costs

These non-traditional lending products have an important use for millions of borrowers that rely on them from time to time. While interest rates for such short term loans can seem high, they’re often lower than fees and penalties for things like bounced checks and having utilities restored if there’s a disruption in service over an unpaid bill. Many traditional banks have raised their minimum account balances as well, and even depositors who are not overdrawn can find themselves dinged when they fall below these minimums, or even find themselves outside formal banking entirely over them.

Until the time that credit card regulation is relaxed, and issuance of small revolving lines of credit is restored to low income working people, it’s likely that they’ll continue to use lenders from the paydayloan industry to meet their unexpected bills.