The payday lending industry is often criticized for being an expensive option of a financial resource. Despite of having this negative reputation, businesses offering payday installment loans are flourishing both online and in the brick-and-mortar stores. The obvious reason for this is the increasing demand for an instant cash resource with convenient application and qualification options.
Critics have unwittingly saddled the payday lending industry. They say that these payday installment loans abuse helpless clients by charging them high interest rates. However, payday lenders defend themselves against this accusation by saying that they lend money that is at a very high risk, which means, they qualify a borrower for a loan even with bad credit scores. Also, payday lenders claim that their clients are fully aware of the rates and they understand the terms before a contract has been signed.
The debate whether payday lenders are giving an expensive loan option to their clients is best explained by a business administration student in New York University named Aaron Gold on his 2008 thesis entitled “Payday lending: Grounding the Policy Debate Through Economic Analysis.” In his thesis, Gold states that the high operating costs justify the high interest rates imposed by lenders on payday installment loans. However, contrary to the claims of the critics of the payday lending industry, payday lenders do not outrageously gain profit from these loans, although they may have higher profit margins than for traditional lenders.
In his study, he disclaims the fact that anyone is qualified for the loan so that payday lenders can prey on needy people. In fact, only those who have a verified stable income are eligible for such payday installment loans. They may consider the application of people with bad credit, but income is still the basis for the approval in order for the lender to be assured repayment of the loan.
Gold has also iterated on his thesis that payday installment loans are designed to be a convenient, one-stop shopping for those who need immediate cash. These loans have gained popularity because traditional bank loans are a hassle for the average income earner.
Gold illustrated the convenience of payday installment loans from the quoted example that compares these loans with a taxi. A taxi is an expensive means of transportation for long trips but it is a perfectly viable means for short distances. So when payday installment loans are used intelligently, they can help people save money over more expensive alternatives, such as credit cards and long-term loans.
As for the allegation that payday installment loans are expensive options for a cash resource, Gold points out that the rates are within reason because the lenders are not allowed to loan more than the actual net income of the borrower. Proper handling of the loans, such as making timely payments, is the key to keeping this type of loan affordable.