Key Characteristics of Payday Loan - Example

Debate: (Against) Pay Day Loans Should Be Abolished Table of Contents Introduction 3 Key characteristics of Payday Loan 4 Easy Application and Qualification Process 4 Regulation and Policies 5 Flexibility 5 Information Security 5 Loan Amount and Interest Rates 6 Major Criticism of Payday Loan and Respond to the Allegations 6 Interests Rates 7 Create Debt Treadmill 8 Allegation of Targeting Low-Income Groups and Minorities 10 Evaluating the Common key Benefits of Payday Lending Services 10 Greater Consumer Welfare 11 Enhance Accessibility to Credit 11 Transparency in Policy Guidelines 11 Conclusion 12 References 13 Introduction A payday loan can be defined as a short-term borrowing process, wherein an individual tends to borrow considerably a small amount of fund at a significantly higher rate of interest. It is also known as pay day advance, which has also been argued as a way of short-term unsecured loan as it does not emphasise on the repayment of the loan amount with regard to the payday of the borrowers. In relation to the present financial market, payday has become one of the most common borrowing systems for people, which enables clients to pay the lending amount after receiving pay-checks (Packman, 2014). However, in various scenarios, the higher rate of interest amount associated with the loan amount often creates major hurdles for the borrowers to repay the loan amount. With regard to the key characteristics, which includes easy to acquire and considerably quick in action can be duly accepted as one of the key advantages of payday loan. Moreover, it also requires very simple procedures, which substantially enable borrowers to acquire desirable amount of financial support as per their requirements (Summers, 2013). In relation to the continuous transition in policies associated with the financing systems, however, the payday loan has been undergoing major debate in the context of insecurity along with budding interest rate of the lenders. In this regard, the primary objective of this essay is to critically define and emphasise on the significant roles of payday loan in response to various arguments that have been made in the global finance industry. Key characteristics of Payday Loan According to the recent financial system environment, the payday lending industry has been recognised to achieve significant rise due to its characteristics along with circumstances of the payday loan debtors. The recent changes in the payday lending industry across different countries, implies that the use of payday loan has become a common and wide accepted financing system for the individuals to deal with different financial needs. However, questions overflowed regarding the key characteristics and their critical impact on the borrowers has been witnessed to be a major subject area of debate (Bhutta, 2013). In response to the arguments associated with the financing system of payday loans, there are numbers of key characteristics that determine the significant role of this particular financing system (Barr, 2012). Few of the widely accepted characteristics that are likely to avert the arguments relating to the financing system of payday loans have been described hereunder. Easy Application and Qualification Process The easy process to apply along with least numbers of conditions required for payday loan can be regarded as one of the major key characteristics. In relation to the basic requirement of this particular lending process, payday loans ensure addressing limitations associated with the payment services of the clients that are often required to pay loans in other financial systems. The fund lending process in payday loans merely requires sufficient income level of the borrowers to make easy repayment of the loan amount. Moreover, the documentation process in the payday loan process only requires the aspect that the borrower has no record of being insolvent regarding the payment of payday loans in past (Cackley, 2011). Regulation and Policies In relation to the regulatory framework, the payday lending industry includes relatively simpler and easier policies for the borrowers than any other financing systems. The regulatory framework of payday loans involves ensuring adequate freedom to each individual borrower to use the lending amount in any type of purposes in accordance with their wishes. In the context of the legislation codes of the UK, Australia, Canada and the US, the regulatory policies do not have any restrictions to the borrowers regarding the key purpose of their payday loan amount. In this regard, the financing regulations and policies associated with payday loans is also a major characteristic than different other fund lending systems (Summers, 2013; Schwartz & Robinson, 2013). Flexibility Flexibility of making repayment of the lending amount is one of the key characteristics in the payday loans. In relation to the basic principles of the financing system in payday lending industry, institutions or groups are likely to provide borrowers with adequate freedom in terms of repayment of the loan amount. The policies associated with this particular fund lending business industry ensure that each individual is provided with convenient repayment options to the borrowers to pay the amount after their next pay-checks (Bourke & et. al., 2014). Information Security In relation to the current fund lending business industry, the process of ensuring adequate security of each component associated with the fund lending process has been observed to rise major concern both for the borrowers and the lenders as well. In the context, the current payday lending industry, institutions or fund lending groups have been recognised to conserve adequate measures in terms of protecting information about the borrowers along with the amounts and other vital information of the fund lending process. The agencies or the institutions in this industry are likely to comply with the strong information security policies that protect financial transaction records of the organisation along with the detailed information about each payday loan borrower (Butler & Park, 2005). Loan Amount and Interest Rates According to the financing system in payday lending industry, the loan amount is varied for each individual borrower in accordance with their income levels. The policy substantially helps the borrowers to face least amount of hurdle to repay the amount of loan. Moreover, the policy also ensures borrowers to avert the risks that might be derived from the cycle of debt. Moreover, this aspect would also help to make the process easier for each individual to repay their payday loan amount (Lehman, 2006; Butler & Park, 2005). In the context of interest rate, the legislative frameworks across different states and nations have been witnessed to protect borrowers from the risks associated with higher interest rates. Moreover, it has also been observed that majority of the states across different nations are not likely to increase the interest rate of the payday lending firms or agencies to limit the actual rate of interest to each type of borrowers. Therefore, the adequate control mechanism of limiting interest rate within the actual amount is also a major characteristics leading to the rise of payday lending industry (Lehman, 2006). Major Criticism of Payday Loan and Respond to the Allegations In relation to the financing industry since the past decade, the growth of the payday lending industry has been widely witnessed to provide major support to the borrowers especially the minorities and the lower income groups across the different global nations. However, the industry has also been recognised to face major criticisms with regard to its key characteristics (Kaufman, 2013). Few of the major criticisms along with their counterarguments associated with payday loan have been provided hereunder. Interests Rates The interest rate has long been recognised as one of the leading characteristics of criticism in the global payday lending industry. According to the various criticisms made by the economists, it has been perceived that the payday lenders are likely to charge excess amount of interest rates in respond to the borrowing loan amount by the individuals. The cost of interest rates in this particular fund lending industry has further compelled the borrowers to believe that the lending system in payday financing could not be considered as a feasible rate of interest for the borrowers. In relation to the different arguments of the scholars, it has been critically identified that the changing or growing amount of interest rate has substantially lowered the capability of the borrowers to repay the loan amount within their postulated time period (Horse, 2013). In response to the arguments associated with interest rate, it can be stated that the regulatory policies in payday lending industry ensures protecting borrowers from different types of issues. The policies in the payday lending industry also prohibits payday lending agencies and institutions to increase the rate of interest due to any types of inadvertent causes such as financial debacles along with uncertain credit crunches in the financing industry. In addition, the governing practices of the agencies and institutions also provides adequate precautionary information to each client with regard to the interest rates of the payday loans that further reduces the possibilities for the borrowers to face any type of interest rate related hurdles (Financial Ombudsman Service Limited, 2014). In addition, it has also been observed from different assessment results that the key reason of higher rate of interest amount as the payday lending services are admittedly focus to involve the poor or lower income groups who can face major hurdles to pay the higher rate of premium amount in response to their payday loans. In this regard, the small amounts that are provided by payday lending services involve a higher amount of interest rate for a short-term period. This aspect can protect the clients to avert the risk of annual interest rate, which might have severe impact on the financial position of this particular group of people (Lehman, 2006). In addition, a higher amount of interest rate for a small fund in a short due time may also protect the low income group people to avert the risk that might be derived from the premium amount of the lending services. Therefore, the allegation associated with the interest rate of the payday lending services can fairly consider be justifiable. However, it is also essential for the lending service systems to look forward about the future hurdles that can severely have an impact on the clients (Lehman, 2003). Create Debt Treadmill According to Montezemolo (2013), it has been ascertained that the financing system along with different processes in the payday loans are developed and often lead to create major long-term debt for the borrowers. According to the observation of the arguments made by the economist, it has been identified that the lending practices that are developed in the payday lending industry often creates major debt treadmill of the borrowers while lending funds from the institutions. In this regard, lack or underwriting for affordability, higher amount of fees, short-term data of due payments, single balloons payments and collateral in the form of a post-dated check are few of the major types of practices that often create debt treadmill of the borrowers involved in the payday lending systems (Montezemolo, 2013). In response to the arguments made by Montezemolo, it can be justified that the business model practiced in the payday lending industry involves extending the credit to a particular group of population including lower income level households, who are unable to obtain financial loans due to their insignificant or poor credit records. Indeed, the survey findings of Stegman and Faris (2003) critically explored that the borrowers in the payday lending industry often have insignificant credit histories and are likely to have obtained one or more bounced checks during their previous five years credit records (Stegman and Faris, 2003). Correspondingly, Lehman (2003) has also stated that the payday lending borrowers are frequently called by the collection agencies due to their overdue payments or bills. In this regard, it is evident that the lending services in the payday system extend the small amounts with uncollateralised credit to the particular high-risk loan borrowers and are likely to provide lending services to the minimum or low level income groups. However, the other fund lending service systems barely include the risk to improve the financial position of the individuals with poor credit histories (Lehman, 2003). With regard to the responses made by Lehman, it can be stated that the allegations made against the financing practices in payday can be considered to overlook the actual merit. Moreover, the allegations more often reflect a typical group of anti-capitalist influencers who have unplanned outcomes regarding the finance markets of the low-income consumers. Nevertheless, the allegations made against the practices underneath payday lending processes also overlooked the creative extension of lending services to the lower income level households who are likely to be excluded by the other financial lending systems (Hynes, 2012). Allegation of Targeting Low-Income Groups and Minorities With reference to the critics made by different economic surveys, the process of targeting low-income groups or the poor and minority groups of individuals by the payday lenders is also a major subject of criticism. According to the allegation, it has been perceived that the majority of the payday lenders are more likely to observe in an area with low-income groups or poor households (Oppenheim & Tierney, 2003). With regard to the allegation of targeting low-income or poor and minority groups of people, the primary aim of the payday lending services is to cover the low-income groups because the lending services are developed to satisfy the needs of those populations who are often subjected to be ignored by the credit unions and other financial service providers. In addition, targeting clients who are financially distressed is also a subject area for the payday lending service providers locating and targeting a specific group cliental (Lehman, 2003). Evaluating the Common key Benefits of Payday Lending Services Despite the continuous debate regarding the financing practices of payday lending, it is evident that the lending processes of this particular service has profoundly enabled the poor or the low-income groups to obtain significant growth in their credit records. In this context, few of the common and most beneficial aspects that are often derived from the payday lending services can be duly accepted to play major role for payday lending services to successfully accomplish its holistic financing practices. Greater Consumer Welfare Providing greater consumer welfare can be regarded as a major beneficial factor of payday lending services. This can be stated as the overuse of payday lending service tends to allow clients obtaining better control on their short-term financial hurdles and enable them to avert the risks of bankruptcy or any type of check bounce related issues (Hall & et. al., 2013). Enhance Accessibility to Credit The services provided by the payday lending systems are likely to increase the credit performance records of the people with low-income as it ensure to offer excess financing support that are barely performed by the other financing institutions. Moreover, the credit facilities to the poor groups of consumers with a particular interest can also be considered as a major attribute of the payday lending system. The process often helps the low-income group people to avert the risk that might be derived from rapid increase in annual premium of the loan amount (Buckland & et. al., 2007). Transparency in Policy Guidelines The key terms associated with the lending practices in payday lending service are prominently displayed in the agencies and institutions. The process provides clear description about the policies that substantially help the consumers to understand and gain their prospective benefits. In comparison to other financing services, institutions are often overlooked to clearly define about the fees and how the amount will be assessed to the respective clients (Hall & et. al., 2013). Conclusion With regard to the fiercely competitive environment in the global financing and lending business industry, it has been considerably witnessed that the lending practices in payday loans often involves major allegations. However, the key lending practices along with well-built guiding principles of this particular lending service have often recognised to overlook different allegations associated with its interest rates, target segments or fewer amounts of costs. In this regard, it can be stated that abolishing or elimination of payday loans may have severe or negative outcome for any particular nation to strengthen its capitalism. Instead of eliminating or restricting the efforts of payday lending to improve credit records of the poor, the critics should emphasise on the principles and lending practices of this particular financing system. 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