Here are the reasons:
- As a business model, it is proven to be resilient and profitable. Diverse portfolio, small exposure, short term nature of the loan and catering to a sector few traditional lenders touch.
- With Americans’ incomes not keeping pace with inflation, and increasing illegal immigration, there is growing need for Payday type loans as more and more people live from paycheck to paycheck.
- While there is State level regulation on Payday practices, this form of lending is highly unregulated and as yet unchecked in any real form by Federal government. And State supervision is spotty. So no wonder new Payday type lenders are cropping up all over.
- Because of small loans and not much oversight, entry barriers are low.
PROS AND CONS
- Easy terms, no collateral
- Negative credit history is not an obstacle
- Very local
- Caters to a segment of population which has no other alternatives to cover their expenditures or budgets
- Very high rates of interest (although many States have Usury laws, so Payday lenders skirt it by calling these “fees” or “service charges”
- Addictive. Since money is easily available, there is less incentive to save and forgo certain expenditures
- Does not improve borrower’s credit history–whereas getting credit from a traditional source, even a store, and paying it down regularly will actually improve your credit rating and open up other doors to borrowing