With credit increasingly hard to come by to the majority of working Americans, alternative forms of financing have arisen to serve people existing in the gaps. Often categorized as the “sub prime market,” individuals who cannot get loans at the erstwhile cheap prime rates of interest are nonetheless conducting their lives, making purchases and otherwise are functioning in the strained economy. Those existing in the sub prime category constitute a full half of the working population.
For those who are employed, the prospect of a regular paycheck means more than having a household that is supporting itself. It also is regarded by payday lenders as a promise to repay on a loan. These are short-term loans that are intended to be “payday patches,” a loan of a few hundred dollars or up to $1500, more or less, sufficient to cover emergency expenses.
It’s unfortunate that millions of people do not have that much cash in reserve, available for times when expenses exceed cash flow. The situation is what it is.
Cash loans are a form of micro lending
Ever since the rise in international recognition of Muhammad Yunus, the 2006 Nobel Peace Prize winner who was so honored for creating micro lending/microfinancing in Bengladesh, the broader concept of smaller, shorter-term loans made in non-traditional ways has taken off. This is seen in the U.S., where faith-based credit unions, peer-to-peer lending and other types of loans have risen up to replace more traditional forms of borrowing – which in recent decades has increasingly been through the use of revolving credit (i.e., credit cards).
Pay day loans (short-term personal loans) are one such form of borrowing, and by the numbers the most popular. Previously available in one form or another (employer-direct loans, and later storefront cash advance lending businesses), these cash loans are now easily transacted online. A social stigma that may have existed previously with such loans has steadily melted away as transacting the loans is done in private, entirely through the Internet.
To summarize, the increased market share that personal loans have captured is due to convenience, loss of stigma and the difficulty of obtaining other forms of credit. It’s a pure example of businesses arising to meet market demand because the traditional players (banks and credit card companies) failed to do so.