There’s a lot of negative talk in the personal finance space about pay day loans. I think most of this talk is justified, as many people get trapped in loans with high interest rates. The rates are so high that sometimes people can only pay the interest on the loans. They can’t pay the principle and get themselves out of the loan. It can be like trying to dig yourself out of quicksand.
If there’s so much money to be made by charging people high interest rates, why wouldn’t everyone open up a payday loan company and get rick quick? Let’s ignore the ethics of the high interest rates for a thing for a second. There are a lot of less than honest people willing to take shortcuts to get rich quick.
I’ve had a little experience lending money on Prosper. From that experience, it is necessary to charge an outstandingly high price to the high risk people with very low credit grades. Even when I was getting 29% interest, I lost money because so many people defaulted on their loans. I can’t imagine the rate I’d have to charge to make money on what Prosper deems high risk or no credit borrowers. Well I can, and it’s about the rate that payday loans charge.
If it was really easy to make money in the payday loan fields, there would be tons of entrepreneurs entering the field and undercutting them by a few percentage points to grab all the business for themselves.
That doesn’t happen because numerous payday loan companies exist still charging tremendously high rates. I believe they need to charge these rates because a large number of their clients never repay their debt or interest at all. It may sound like conjecture on my part and in some ways it is. However,
I can’t recommend that people get payday loans. When you compare payday loans, it’s too easy to get trapped into a hole you can’t dig out of. Still, I think that payday loan companies aren’t nearly as predatory as they are made out to be. I think they are just charging what needs to be charged to make an honest profit. If people were more responsible and didn’t default on their loans, payday loans wouldn’t need to charge such high rates.
I think it’s up to the consumer to educate themselves about credit before they find themselves in such a situation. When in doubt one can look towards an loan intermediary such as this Swedish one.