Payday Loans: Helpful or Hurtful
There is a new trend in lower income communities in the United States called payday loans. The popularity of getting payday loans to help to pay off utilities and short term debts. These loans have become controversial and brought on speculation of the ethics of the loans and their practices. There has been legislation brought through state senates on this issue but with heavy lobbying have not be able to see the light of day. The tactics of these lobbyists have also come into question. The overall question to be answered is if payday loans are good for this country.
II. What are Payday Loans?
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However, when payday comes the entirety of the principle is not paid off due to the fee. This is when the interest rate comes into play. With the unpaid principle the interest rate is applied raising it even higher. The interest rates on these payday loans can get up to triple digits in some cases. This causes the person to have to pay double or even triple what they borrowed.
For example, we have Bob who is a lower income worker that has the entirety of all his paychecks go to bills for his house. Now if Bob has a paycheck of $120 to be paid in two weeks and needs that money this week to buy his groceries then Bob would go to a payday lender. Now let’s say the fee for this lender is $20 and loans have an interest rate of 50% monthly. Bob would then would take out a loan for $140, the paycheck plus the fee, but write a check for $120, the amount of the paycheck. Once payday comes $120 of the loan would be paid off leaving $20 left still on the loan. The interest rate then applies to the $20 left over making it $30. This is because 50% of 20 is 10 plus the original 20 equals 30. The next month the $30 then becomes $45 which then turns into $72.50 and so on. Within 6 months after the original loan was taken out you have the principle now at $151 which is higher than the original $120. Now remember that all of Bob’s paychecks go towards bills that end up in him not being able to pay the principle off and the debt to continue to accumulate. The common solution to this problem is to take out another loan which restarts the whole process with a new fee and another 6 months of debt.
III. Is it Ethical?
The original purpose of payday loans was to help financially need individuals to get money to help pay bills before their paychecks came. Where the plan went wrong is that it didn’t end once numerous customers went into a deep amount of debt. It should have been a red flag for the payday lenders to fix this problem once the debt began to pile up on countless individuals who already had money problems. This becomes an ethical issue because the lending did not end and began to seem as though the goal was to go after these individuals. The practices being used would be considered unethical due to the predatory nature portrayed. These unethical practices include hurting people who are already suffering from a lower income than most, loop holing set lending laws, and tricking people into thinking they are in good hands.
Payday loans are meant to give people an advance to be able to pay off certain expenses before they are given their paychecks but these loans hurt the people more than help them. At first glance payday loans look like a great idea because they give money to people when they need it most and allows them pay it off with their paycheck. This is also often the only type of credit available to these individuals. However, if you look deeper into this you see that the interest on the loans applied to the left over fee accumulates at a...