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Payday Lenders making a Comeback

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In the aftermath of the subprime lending crisis, it seems logical that high-risk loans would be scorned by the financial community.

An increase in payday lending, however, proves that this is not the case. It’s also an indication that the check cashing business is here to stay.

The financial services industry is known for having a variety of products.

A segment of the population that has long gone underserved, however, are people with low incomes.

According to the New York Times, more than 28 million Americans are without a bank account, and more than 50 million have no credit score.

Excluded from mainstream credit, low-income people turn to check-cashing outlets.

Although the interest rates on the loans scream of predatory lending, these payday lending establishments are filling a void in the marketplace.

Although they may not be as easily identifiable as the golden arches, they’re everywhere.

More numerous than McDonalds and Starbucks
If you think payday lending outlets are restricted to poor sections of the country, think again.

The various check cashing and payday lending storefronts throughout America outnumber all the McDonalds and Starbucks outlets combined.

Every day, lines of people visit check-cashing outlets with paycheck in hand.

They charge a fee for each cashed paycheck, the average fee for a loan of $255 for two weeks equals $45, which is nearly18 percent.

Those fees can equal 450 percent interest on an annualized basis, which is eerily reminiscent of the predatory lending that took place with subprime mortgages.

Serving the underserved
The outcry from consumer protection groups has fallen largely on deaf ears.

Nationally, payday lenders are allowed to continue making unsecured loans, largely because these businesses aren’t tied to larger financial institutions.

Unlike the subprime mortgage industry, in which loans were tied to mortgage-backed securities, payday loans are unsecured.

The risk falls entirely on the company.

Like it or not, this is the only industry which seems willing to serve low-to-middle income families.

Without a credit score or bank account, traditional banks aren’t likely to touch this clientele, especially considering the fallout from the subprime catastrophe.

Credit unions, originally created to be the bastion of poor people with low incomes, are just beginning to consider the payday lending field.

Kinecta Federal Credit Union, for example, bought the payday lender Nix Check Cashing.

They’re now charging a slightly lower rate for a payday loan, and including a $20 rebate if a loan is paid on time for six months with no bounced check.

Yet the interest rate and the fees remain disproportionate to what people with good credit would pay.

Unfortunately, the laws of risk management dictate that people with poor credit should pay higher rates.

Just what separates a higher rate from predatory lending is something the financial sector or Congress will need to resolve in the future.

Until it does, payday lending will continue to thrive in its current form.

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