Payday loans

Payday loans are a form of subprime lending, similar to high interest rate credit cards.

Opponents claim that payday lenders are usually situated near military bases or in low-income areas and target the young and the poor, who often may not understand the time value of money. Some even compare payday lenders to loan sharks due to high interest rates; typically 250% or more when annualized. There have also been incedents where payday lenders have pursued criminal bad check charges, despite the fact that they knew the check was bad at the time when it was written. Similarly, it is argued that the interest rates on payday lending (and on rent to own purchasing) unfairly disadvantage the poor, compared to the middle class who pay at most 25% or so on their credit cards.

Defenders of the higher interest rates note that payday loan processing costs do not differ much from their higher-principal, longer-term counterparts such as home mortgages. They argue that conventional interest rates at these lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would only generate 38 cents of interest, which would fail to match loan processing costs. They also argue that the interest on a payday loan is less than the costs associated with bounced checks or late credit card payments. They also argue that the interest cost accurately reflects the increased risk of default, a concept known as risk based pricing.

The best alternative for those unfortunate to get sucked into these loans is tho pay them off as soon as possible. Prosper.com offers a solution by offering the lender alternate sources of funding at reasonable rates.

Of course, the best way to avoid payday loans is to create alternate streams of income so you're never in a tight spot. Particularly useful are ways of making money online,since they provide time and geographic independence. Like this blog!