Because of the high interest rates charged for payday loans, many experts believe borrowers who opt to go this route have no other option. Maybe these lenders are the only ones willing to take a gamble on these borrowers.
This would lead one to believe that all payday loan borrowers have wrecked credit; however, new data begs to differ. According to an analysis of credit, not all borrowers using payday loans have subpar credit scores. The report was compiled by FactorTrust, a credit bureau that is owned by TransUnion.
“The assumption was the consumers who participate in this market are very deep subprime or unbanked, that’s why they’re going to these lenders,” Liz Pagel, TransUnion’s financial services business unit vice president, told American Banker.
But the results of the analysis were surprising. While 66 percent of those in the database who utilized those loans were subprime, 12 percent were in the prime and super-prime lending categories. That means those borrowers could have likely found another borrowing option that would have been a better deal for them, such as personal loans.
Why those customers went for payday loans and pawnshop loans instead of saving money on a lower-interest loan wasn’t clear. One theory is they may have preferred the ease and speed of a payday loan compared to the more traditional routes. In fact, a 2017 survey by LendEDU found that some borrowers had positive experiences with payday loans.
Of those who have signed up for short-term loans like these payday loans in this analysis, 75 percent also have done business with traditional lenders.
The Popularity of Payday Loans
Despite having a wide-spread reputation as being a bad deal for borrowers because of high interest rates, payday loans continue to be widely utilized.
They are easy to get and quick to obtain. This can make them an attractive option for borrowers who need money quickly for an emergency, even if they have the credit score to get a loan with a better rate. For the convenience of borrowing quickly, some borrowers are apparently willing to shell out more money in fees and interest during repayment.
Information like this is important for traditional lenders to see because it might persuade them to take a second look at how they do business. By taking a second look at their own offers and systems, they might be able to reach this segment of the population who unnecessarily spend more money on payday loans.
How to Avoid Payday Loans Altogether
While payday loans can be a handy alternative when a person needs money quickly, consumers would still be better off avoiding them if possible. Consumers might instead consider searching for online lenders that offer personal loans with a track record of fast approval and disbursement. Some lenders also offer small-dollar loans if you want to borrow less than the minimum for a typical personal loan. For borrowers with bad credit, installment loans might be a more affordable alternative.
But in order to avoid tapping into these loans, consumers should begin building emergency funds. Everyone will have an emergency at some point – whether it’s an unexpected medical issue, a car accident, a natural disaster, or a job loss. Emergencies are pretty much a guarantee in life, so it pays to be prepared for them.
Experts recommend having anywhere from three months to six months of living expenses saved in an emergency account. That might seem daunting, but consumers should focus on building at least $1,000 in emergency savings and working their way up from there.
Author: Shannon Serpette
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