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Payday Loans Reach 44% Default Rate
Christian T. Rogers
December 19, 2011 - Payday loans are gaining momentum in the number of loans issues due to the relaxed qualification standards and easy access to online payday loans. These short-term installment loans are more popular than ever these days and with the rapidly growing number of borrowers, the default rate on this kind of loan is also growing at a staggering rate. A recent study found that up to 44% of payday loans that were issued in 2011 ended up in default before the loan was completely paid as agreed.
Payday loans, sometimes referred to as cash advances or cash advance loans are typically issued with no credit check and in the case of online payday lenders, with no personal contact or physical signature required. Because of these very soft lending standards, the loans are especially appealing to those consumers who may not qualify for more traditional lending sources. The reason that these borrowers don’t usually qualify for traditional loans is that they are a higher risk client and therefore carry with them a higher default rate on traditional loans. Payday lenders by nature target those high default borrowers so by their own invention, they naturally experience much higher default rates than banks and credit unions that have turned away the average payday loan consumer.
Some may say that the interest rates charged by payday loan companies are exorbitantly high, however when one looks objectively at the default rates for these loans it is easy to understand why the lenders must charge the higher rates to cover their losses on the borrowers who end up no paying their bills. It’s the same principal that banks and credit unions use wherein they charge a higher interest rate to borrowers with lower credit scores. The lower the credit score, the higher the probable default rate on the loan so the banks charge a higher rate in order to cover their potential risk of default. The only difference is that the banks and other traditional loan providers cut off their loans at a certain low credit score and payday loan providers don’t have any such cutoff point.
Interestingly enough, the default rate for cash advances is higher in the geographic South, but at the same time the number of payday loan stores are also higher in the Southern states. For a long time, states like Alabama, Mississippi, Louisiana, Georgia and Arkansas have been at the bottom of the economic spectrum in the U.S. and with those states leading the nation in households living in poverty, it stands to reason that there would be a higher need for non-conventional loan products to serve the low income and unemployed population In those areas. Payday lenders and online payday loan providers go to where their market is, even if that market has a propensity towards defaulting on the loan that is provided.
Three things we know. People all over the United States will continue to apply for payday loans. Payday lenders will continue to give loans to people who can’t qualify for traditional loans. Those borrowers will continue to default on those payday loans and cash advances at a very high rate. Despite the high default rate and seemingly flawed logic of this set of circumstances, it seems that payday loans and online payday lenders will continue to offer this service and continue to grow throughout the years to come.
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