Critics of the payday industry often characterize online direct lenders of payday loans as predatory financing institutions that prey on customers. In addition, they say that these direct lenders of payday loans provide terms and options that make a borrower’s life more difficult.
In some instances, many people think that these online direct lenders of payday loans gain luxurious profit because they are charging high interest rates. The truth is these online lenders are more at risk compared to an average lender in a payday loan store, in banks, and credit card companies.
Contrary to the popular belief, most online direct lenders of payday loans do not make as much money as they appear to. In fact, it can be very difficult for them to make a profit. This is because they are at risk of payment defaults. As you can see, most online direct lenders of payday loans do not have a community presence, they are more vulnerable to loss of profit if a customer decides not to pay the loan. Unlike a traditional payday lending store, all transactions for online lending are done through the web, so there is no exact personal or face-to-face encounter.
There is no comprehensive data that can validate the claims of these online lenders about how high the risks are that they taking on defaults and late payments, a study by an auditing firm of Ernst and Young can confirm this. In addition, the study reveals that losses of online lenders are estimated to be around 25% of their operating costs.
In 2009, the firm conducted a study on all the members of the Financial Service Centers of America (FiSCA). FISCA has been a professional trade organization of financial service center providers in the United States since 1987. These financial service centers include those that offer basic financial services in the form of check cashing, money transfers, money orders and short-term loans such as payday installment loans.
The study revealed that for every $15.26 charged on a $100 loan, $13.74 of the fee went only to compensate for bad debts. This shows that there is only a $1.00 that can be considered as profit of direct lenders of payday loans. For this reason, most online lenders add fees for late charges and default payments. This is also the reason why they tend to be predatory with their fees. But even if they add these fees, these online direct lenders of payday loans are still at risk of loss because there is no assurance that these debts will be paid by the borrower.
Many borrowers and even critics of the industry charge online direct lenders of payday loans to be predatory and the root of people’s endless debts. But the greater picture shows that borrowers are the ones who push these lenders to do so. Unfortunately, online lenders are put into an uneven situation because of the irresponsible handling of some borrowers of their loans. If defaults and late payments on every payday installment loan continue, these lenders will continue to be predatory in their business.