I have made a decision to write a few articles about the payday loan industry. In these series of articles, I intend to write about the legal aspects of loaning money against future paychecks. I also plan on writing about the following:
- Direct lenders
- Payday loan brokers
- Online payday loan companies
- Storefront Companies
- The 24 hour guarantee
- Payday loan rates
In order to discuss this topic with some intelligence (I don’t have much) I did some research on the industry. I am taking an unbiased perspective and will provide the pros and cons of the industry. It is important to first understand what a pay loan is. A payday loan also referred to as a cash advance is a short-term loan (typically 1 or 2 weeks) that is borrowed against an applicant’s next paycheck.
Payday loans are very expensive and should only be intended as a short-term borrowing tool and not a long-term solution. There are some people that say that payday loans were first introduced in the early 1900’s under different names, however the term “payday loan” was introduced sometime in the 90’s. Today there are over 20,000 storefronts throughout the United States that offer cash advances.
The underlying legal issues with payday loan advances are usury laws. Usury laws are in place to regulate the industry from charging excessive rates for borrowed money. There are interpretations on both sides as to what is excessive. These laws are typically set by each state. A state may determine that payday loan and cash advance transactions are illegal in the state. There are some states that make pay day lending illegal however there is an abundance of information on the internet that states some companies will still loan in that state because of loopholes.
The industry as a whole believes if a transaction occurs in a state in which cash advances are legal, than it shouldn’t matter where the borrower is located. The industry is regulated by each state and regulators range from state Banking Departments, Departments of Financial Institutions, State Boards of Collection Agencies to Departments of Corporations and so on. The regulators oversee the industry and are available for consumer complaints on any company providing pay day lender.
If you do a search on the internet for payday loan companies you will find the majority of the websites listed on the top pages of the search engines are brokers. Payday loan brokers are typically lead aggregators that have an automated process of getting leads out to the direct lenders. Because the payday loan industry is so competitive, most companies pay top dollar for these leads.
Most cash advance brokers have a disclaimer at the bottom of their websites that state the company is not the direct lender. This relieves most brokerage firms from potential legal issues that may arise from a transaction in a state which makes it illegal to perform payday loan advances.
While a simple cash advance may seem easy to grasp there are a lot of gray areas in the industry. As the industry matures I believe there will be stricter guidelines for the lender.