The image of those using pay day loans is often presented as the very poorest in society being taken advantage of by predatory loan sharks. The reality is different to this view, as only those in regular employment are eligible to meet the terms of the loan in the first place. It is actually middle income Americans who are turning to pay day loans.
Pay day loans are available to those who live from pay check to pay check, have no savings, and have either no other form of credit or are maxed out with existing credit. When an emergency arises it is possible to obtain a speedy, short term loan immediately, to be repaid from the next pay check. The loan will carry a high interest rate, but in reality that rate might amount to a lesser charge than a reconnection fee if a utility is turned off, or the charge on a bounced check. Used in this situation a pay day loan is a viable option for someone as a short term measure.
Increasingly though they are being used by those who have already run out of other avenues of existing credit, who maybe carry maximum balances already on their credit cards and are no longer deemed credit worthy. These are irresponsible borrowers who will most likely end up being caught in the expensive trap of pay day loans too, ending up taking out another loan to pay off the first one, and further digging themselves deeper into debt.
Pay day lenders have stores in what are now middle income areas, though many moved into areas near to military bases until active military personnel were told they were not allowed to use this method of finance. The military deemed that the average member may end up in financial hot water by using them. The poorest lower income areas are not the target base for loan stores as the borrowers must be people with a regular pay check and a current active checking account. The demographics of the borrower are moving upwards into more affluent neighbourhoods.
Although a borrower may be a bad credit risk the advance arrangements to recoup the loan work well for the lender, as their method prioritises the repayment of their loan when the borrower receives their pay check. Increasingly the internet is seen as a means of obtaining a pay day loan, providing anonymity to borrowers who shy from visiting a loan store, but again showing that the people who use these loans are working people with online bank accounts and access to computers.
The furore against pay day loan lenders targeting the poorest segments of society don’t really ring true when one considers the average income of those who use them. The reality is that they are used by those who are not well educated in matters of finance, and are just looking for a quick emergency fix until the next pay day. Those who end up caught in the loan trap have to take personal responsibility for using them in the wrong way. For a cetain segment of Americans already maxed out with credit card debt, this could be the new way of dealing with their finances.