You may have heard stories of predatory lending practices of some online lenders of payday installment loans. Some even exaggerate the information so that many borrowers are discouraged from getting one.
Critics of the payday installment loan industry have never run out of criticism about online lenders of payday installment loans. They often accuse online lenders as being predatory and preying on innocent customers. They say that these online lenders of payday installment loans provide terms and options that make a borrower’s life more difficult.
There are even some instances that make people think online lenders of payday installment loans reap luxurious profits by charging high interest rates. There is no truth to this and many online lenders are more at risk compared to average lenders like banks and credit card companies.
Contrary to the popular belief, most online lenders of payday installment loans do not make as much money as you may think. As a matter of fact, it can be very difficult for them to make a profit. This is because they are at high risk of payment defaults.
Most online lenders of payday installment loans do not have a community presence, so they are more vulnerable to the loss of profits if a customer decides not to pay for the loan. Unlike a traditional payday loan store, all transactions for an online payday installment loan application are done through the web, so there is no person or face-to-face encounter.
There is no comprehensive data that can validate the claims of these online lenders about how high the risk is that they are taking; however, a study by the auditing firm of Ernst and Young confirms this. The study revealed that losses of online lenders are estimated to be around 25% of their operating costs.
When the firm conducted a study on all the members of the Financial Service Centers of America (FiSCA), a professional trade organization of financial service center providers (check cashing, money transfers and money orders, and short-term loans) in the United States since 1987, they saw that for every $15.26 charge on a $100 loaned, $13.74 of the fee went only to compensate for bad debts.
This shows that there is nearly $1.00 that can be considered as true profit for online lenders of payday installment loans. For this reason, they add fees and late charges on default payments. But even if they add these fees, online lenders of payday installment loans are still at risk of loss because there is no assurance that these debts will be paid by the borrower.
Many borrowers haven’t looked at the real picture of how online lenders of payday installment loans also struggle. They are often accused of predatory lending practices, but borrowers push these lenders to do so. Online lenders are put in this situation because of the irresponsible handling by some borrowers. If defaults and late payments continue, lenders have no choice but to charge high interest rates to protect the interests of their business.