The Upside to Payday Lending
Investing in a cash advance or payday advance lender is an extremely wise move for the businessperson looking for a small cap industry with rapid growth. This industry, which was unknown until the late 1980s, has spread throughout the US and Western Europe. In this country alone, there are over 10,500 storefronts and innumerable online or virtual storefronts that are filling this niche.
The premise behind the business is to offer ready cash to nearly anyone who needs it, for whatever reason, in the form of an unsecured, very short-term loan. Most loans are for two to four weeks and are timed according to the paycheck cycle of the borrower. Initially, the customer would give a post-dated check for the principal and a flat handling and interest fee to the lender. The only criteria were that the borrower had a regular source of income, was 18 years old, and had a checking account. The lender would hold the check until the customer’s next payday, at which time the check would be deposited. The customer got cash before his or her payday, and the lender got a nice fee for his trouble.
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Sometimes, the customer wouldn’t have enough to pay the loan in full by the next paycheck. When this additional cash flow problem occurred, the lender would offer to roll the loan over for an additional two weeks, at an additional fee. Sometimes, these fees would grow to many times the amount of the original loan before the borrower could pay the principal in full.
Even though this type of unsecured loan is considered high risk, in actuality, the profits are extremely high, partly because of the repeat business through the rollovers of the loans. Because of this profitability, the industry spread rapidly, especially in the areas where this type of loan was one of few perceived options, i.e., around military bases and in lower-middle class areas, the same areas that support the pawnshop and check-cashing businesses.
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The industry thrived, especially when current technology was adopted. Risk was lowered by the use of tools such as Teletrack, which can verify an individual’s banking history online. The large national banks saw the profitability of these loans and began to fund the lending of many of these companies, allowing them to expand. They have now expanded into the area of the Internet, allowing every person with computer access to apply for one of these loans from the comfort of his or her own home.
This industry grew so fast it was largely unregulated by the government until recently, athough a large portion of the businesses in the industry established basic ethical standards through the Community Financial Services Association of America (CFSA). At this point, about half the states in the US have some regulations in place to limit APR and numbers of rollovers permitted in a year.
In the future, expect to see more states and the federal government begin to regulate this industry and to see the rates continue to drop as the larger financial companies continue to fund the current lenders and add this type of service themselves. It will continue to be an excellent industry for investment for some time.
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* Cash-Advance-USA.org provides information and research on cash advances/payday loans. We are not a payday lender or broker, nor are we necessarily affiliated with the companies profiled on this site. Not all products and services are available in each state.
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