Understanding Why Payday Loans Are So Important

Have you ever found yourself dealing with cash flow problems at the worst time possible? If yes, then you most likely know how hard it is to secure a loan during those moments. Indeed, while certain traditional loans can be made available within a relatively short period of time, they are hardly helpful in situations of emergency. On the contrary, payday loans are available at literally all times, which partly explains why they are sometimes labeled as the last resort of borrowers. To understand why payday loans are so important in the U.S., please keep on reading.

What are the drivers of the demand for payday loans?

As mentioned earlier, borrowers typically turn to payday loans after having been denied for funding by traditional financial institutions. In most cases, such individuals will have a shaky financial situation, and thus be viewed as at-risk by lenders that essentially accept to provide financing to loan applicants whose ability to repay has been determined.

According to a 2009 paper written by Robert DeYoung and Ronnie J. Phillips, there are two main drivers of payday loans demand, such as:

  • Low income
  • Lack of education

It was found that borrowers who request this source of financing are making less than $40,000 a year, and/or never completed their undergraduate education.

Without the payday lending option, some of them would hardly be able to address their urgent financial needs, including medical expenses, for example.

Are the critics directed at payday lenders justified?

The short answer to this question is no. The real problem with cash advance borrowers is that many of them use this source of financing for non-emergency situations. Cash advance loans were initially introduced to help individuals address short-term cash flow problems, but today the overuse of these debt instruments is what is causing many borrowers to deal with monstrous debt.

Part of this debt problem can be explained by the fact that the U.S. is a society of consumption. It's quite common to see people live well above their means, and acquire things that they sometimes don't need. Given the high cost of borrowing that is associated with cash advance loans, aspiring loan applicants are strongly recommended to first develop a sound strategy to eliminate their debt in the long run, before even requesting a payday loan.

As you might see, payday loans hold a critically place in the American society. But, it's the borrower's responsibility to use them wisely. To learn more, contact a company like USA Cash Services with any questions you have.