You know about payday lenders from the news. They are short term cash lenders that charge loans to people struggling to make ends meet. Payday loan interest rates tend to be much higher than mainstream banks. Despite the bad press, millions of people still take out payday loans when they run short of money. Restrictions limiting these high interest rate lenders are in place in nearly every state in America. And, while placing limits on payday lenders certainly have benefits for society and individual borrowers, there may be unintended consequences driving the needy to illegal loan sharks.
Common Lending Restrictions
State and local governments regulate all legal lenders I the US and UK. Traditional banks limit account holders in many ways. There is a maximum amount of money you can withdraw every day. There are limits on your transfers, withdrawals and deposits. These rules protect you and your finances. State restrictions on payday lending also limit the number of loans you may have outstanding at any time. Payday lenders are also limited in the interest rates they may charge, but these caps are much, much looser. In fact, with much higher interest rates and potential penalties for missed payments, many view payday loans as among the worst choices available to the cash-strapped.
Despite the risks, the practice of payday lending remains popular. You should learn more about loan shark rates and the restrictions that affect the financial industry.
The Effects of Restrictions on Payday Lending
Payday loan interest rates can extend into the triple digits. Missing a single payment could lead to a downward spiral into debt. Still, payday lending is popular because the process is fast and easy. Unexpected events happen in everyone’s life. Some people have medical emergencies, while others have car accidents and sudden house repairs. People have found a way to get fast cash for an emergency. Going to a bank means jumping through a lot of hoops, which includes waiting weeks for an approval and showing proof of good credit. In the case of an emergency, waiting around for an approval is not an option for many people.
More Illegal Businesses Are Appearing
nUnless we believe the need for short term emergency cash is falling, restricting payday lenders will only force bad credit borrowers elsewhere. Where will they go? Some seek out illegal sources of money or loan sharks. In the United Kingdom, there has been significant growth in the number of loan sharks, and business has been good. According to the Consumer Finance Association, what was once a small loan sharking industry in 2010 has ballooned. The study Credit 2.0, conducted jointly by The CFA and Equifax, says approximately 310,000 families had been in some contact with illegal money lenders in the United Kingdom by 2014. The study goes on to suggest the cause was:
“In a large part due to a regulatory environment that permits high cost credit and does not prevent those with adverse credit history from borrowing in the legitimate market.”
There are similar stories in other Western European Countries and in Asia. Needy borrowers are forced to turn to loan sharks for emergency money after lending caps were put in place.
Payday Loan Interest Rates
The level of payday loan regulation and caps on payday loan interest rates varies in each state. All states regulate payday lenders, but states impose stricter regulation. In Wisconsin, the maximum loan amount is $1,500, and the maximum term is 90 days. In most other states, the limit varies from $350 to $500.
While Payday loan interest rates are easy to spot compared to normal banking rates. Pay attention to any number that you see in the triple digits. Some states do not regulate the APR rates closely and allow payday loan interest rates as high as 521%. In some states that forbid payday lending, the maximum interest rates are no more than 25%.
There are legal and illegal markets in the lending industry. Illegal sharks operate on their own rules and terms. They do not follow the state and federal laws exactly as stated. They get away with their illegal practices by hiding many of their tactics.
Managing Reality
Regardless, people still feel the need to approach loan sharks and ask to do business with them. The popularity of fast cash has caused this rise in illegal businesses. The reality is that many loan sharks operate illegally, and you must know the law to understand when a lender is drawing the line.
In the UK, local loan sharks are on the rise as more people look for short-lived solutions to their financial troubles. The average loan limit is £500, but the interest rates are uncapped. If you borrow £100 for a loan, you could pay £25 in interest alone.
Payday lending, both legal and illegal, is rising in the U.S. and the UK. More people are borrowing short-term loans without thinking about the alternative options. Loan shark rates are acceptable for some people, but unacceptable for others. Everyone has a different opinion about the operations that go on in the payday loan business. However, nearly everyone agrees that loan sharks are not the solution for borrowers in financial trouble.