Modern Payday Loans - Essay Example

As the nation struggles with a high unemployment rate, the payday loans industry has come to be one industry that is absorbing a lot of unemployed citizens.

The economic relation in determining the interest rates on loans paid to low-income earners and middle and high-income earners emanates from the common principle of guarantee and surety. It is logical to assume that middle and high-income earners would easily pay off their loans. To the lender, it is the low-income earner who would face problems paying off the loans. Experience has shown that some low-income earners stop paying off their loans halfway through (Gardener, 2008). This means that if higher interest rates were changed, the lender may not have much to lose because of the stoppage because, at the time of the stoppage, they might have made enough accumulated sum for the original amount taken.

Banks seem to be refusing to enter the venture because of the risk involved. It would be noted that the loans are mostly patronized by low-income earners who cannot guarantee payment. The banks, therefore, do not want to risk having their monies made away with especially as the economic meltdown seems not to have been recovered from. In the absence of payday loans, those who benefit from them would simply have had to cut down on their expenditure to make their earnings sufficient for them.