The different myths surrounding payday loans

The different myths surrounding payday loans

Jan 26, 2019, 5:17:52 PM Life and Styles

Payday loans are falsely thought to be loans provided by unscrupulous lenders who carry out their business without regulation or concern for their customers. This is factually incorrect.

There is heavy regulation of the payday loans sector and the industry operates with full transparency. It is mandatory for all payday loan lenders to strictly follow all the guidelines and regulations laid down by federal and state laws. All necessary details have to be provided by the lenders before they lend money to borrowers and the lenders also have to ensure that they treat all customers in a fair and just manner.

Just like every other sector, the payday loans industry is also surrounded by a lot of myths, misconceptions, and fallacies. Most of these false impressions are due to failure of customers to fully understand the terms and conditions of the loan agreement and/or due to irresponsible borrowing.


Some of the most common payday loan myths are discussed below.

  • Payday loans have high interest rate: Payday loans are short-term two weeks loans and the average interest rate for a 2-week loan is around 15 percent. Thus, when the loan is repaid in the stipulated time period, the interest is not high. It can however increase steadily if the payday loan is rolled over. The interest rate reaches its peak when the loan is rolled over to its maximum number in a year, i.e., 26 times. Thus, the steep interest rate is not associated with payday loans, but with irresponsible financial behavior by the borrowers. It may be noted that most states have placed restrictions on the number of times a payday loan can be rolled over.

  • Payday loans lenders target senior citizens, minorities, and poor customers: This is false because most studies have shown that a majority of payday loan lenders are middle class working people who do not have adequate savings to take care of emergency expenses. Also, just around 5 percent of payday loan borrowers are over the age of 65 years.

  • Payday loans can result in debt traps: This is another common myth. As stated above, the restrictions placed on rollover of payday loans prevent borrowers from falling into a cycle of debt. Most states have limited rollovers to just 8 weeks.

  • Payday loan lenders do not follow regulations: In the US, payday loans are regulated in 34 states. Lobbying and initiatives about regulating the industry in all 50 states are ongoing. There is no excessive regulation which can hamper payday loan lenders from doing business, but it is fair and supports borrowers as well as lenders.

  • Excessive fees allow lenders to earn huge profits: Short-term loans have high administration charges. Hence, a lot of banks have stopped offering them. There are many costs associated with running a payday loan business, such as salaries, insurance, benefits, etc. As per reports, the average profit margin in the payday loan sector is a little over 3.50 percent.

Published by Joe Pirest

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