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You can find them almost anywhere.  They are present in urban strip malls and stand alone storefronts across the nation and lure many unsuspecting individuals into their clutches.  I am talking about payday loan lenders, one of the most controversial businesses of the last twenty years.

Payday loan lenders can generally be found where the population is less affluent, a place where they say their services are needed but critics claim that they prey upon the working class.  At first, many payday loan lenders opened their shops near to military bases where the majority of the individuals were living on a soldier’s wages.  So many military members fell into the trap of payday lending that there was a new law created prohibiting payday loan lenders from lending to members of the military.

This does not stop the payday lenders from lending to the rest of the nation though.  Most at issue is the interest rate that these lenders charge for their brief loans to the public.  The interest rate for a typical bank loan or credit card is between 5% and 10% annually while the interest rate charged for a loan from a payday loan lender averages between 400% and 800%.

The Trap Of Payday Loan Lending

Many of the individuals that use a payday loan lender get trapped into an endless cycle of debt, where the only way that they can pay off the current loan is to reapply for another loan as soon as the money has left their account for the first loan.  Many of these individuals are already living paycheck to paycheck and use the payday loan lenders because they believe that there are no other lending options available to them.  Unfortunately, many of them are unable to afford to pay off the entire loan when the two or three week loan period is up, so they take out another loan as the payday lender rakes in their 400-800% interest rate payment for each loan.

It is estimated that the average individual using a payday loan lender takes out more than 7 payday loans each year, with a high percentage of the loans occurring back to back.  This indicates that a high number of individuals are unable to repay the original amount and take out a subsequent payday loan to cover the charges for the last loan.  In this way, many payday loan recipients find themselves paying a great deal of money in fees to the lender with no way out of the cycle.

Most financial experts agree that payday loans are a bad idea and that the interest rate is exorbitant for the services that the lender provides.  A number of states are attempting to enact legislation that will cap the amount of interest that a payday lender is allowed to charge at a 36% interest rate, more than ten times less than many of the payday loan lenders are charging now and a rate that they say will cause them to go bankrupt and put them out of business.  Only time will tell what the outcome of that situation will be.