California Payday Loans

Payday loans are unique financial products; usually not offered by big reputed financial organizations. Not every state in the US allows payday loans. However, California is one of the 18 states that allow payday loans. As the name suggests, they are loans which are linked to the day one receives his/her weekly, bi-weekly or monthly pay. Payday loans are very short term loans which usually get re-paid on the day one receives his/her salary. Also the loan amount is often very small.

People are usually short of money towards the end of their pay cycle. Say the pay cycle is weekly, and then people start feeling need of money as the week is coming to an end. They have to pay some utility bills or buy something immediately but are short of few hundred dollars. Payday loan lenders come to their rescue. They lend them the money and charge a small fee. The fee, however, when calculated in terms of interest equals to an extremely high annual interest percentage. So the borrower in turn gives a post dated check to the lender or an authorization whereby the lender can automatically debit the borrower?s checking account. When the individual receives the salary, the lender presents the check in his/her bank and the loan along with the service fee is repaid. If the individual decides to extend the loan, then the fees are increased accordingly as per the increased loan tenure. The borrower usually gives a new post dated check or direct debit authorization. This extension of an existing loan is often called loan rollover in the financial world.

Payday lenders are many times accused of working in a suspicious manner and face the anger of the California financial regulators. There have been claims that they act under the disguised blessings of big banks and violate the consumer and legal laws applicable to small lending?s. ?Big banks and financial institutions are in turn accused of pumping money to the payday lenders who in turn give them a handsome share of the high fees earned by them. These transactions between the payday lenders and the financial institutions are often secret or poorly documented. On the borrower side, Payday loans by its high fees erode the savings of the innocent borrower. A very few borrowers are cognizant of the fact that they are paying a very high interest for the money received. Since the absolute fee amount is small, usually around $50, they don?t realize the high interest payment they are making. Also the borrowers are often lazy to keep a track of their income and expenditure. ?Payday loans by its structure are meant as emergency resource of money. However, studies suggest that people, either knowingly or by ignorance, tend to rollover the loan and continue to pay the exorbitant interest rate.? Such loans tend to become a habit. The outstanding amount slowly creeps to become a big high interest debt. However controversies apart, payday loans are popular among its customers. Payday lenders, as compared to traditional loans, don?t ask for huge documentation from the borrowers. All they look for is a steady source of income in the borrower?s profile and an open checking account. Hence, though they are extremely costlier compared to the traditional loans they are still around. Moreover, unlike the complex fee and interest calculations which are associated with a traditional loan, Payday loans have a flat fee and no hidden costs. Also the borrower usually takes money in cash and hence is able to meet his demands instantly. Moreover all those who don?t qualify for traditional bank loans don?t have savings resort to the Payday loan method of financing.

With all these controversies, the payday lenders are slowly forced to change their way or working. Lenders are cajoled to lower the fees and restrict rollovers. Some payday loan lenders, usually banks, ask their borrowers to make regular deposits to the bank. These banks then give the payday loans to only those customers who have a sizeable deposit with them. In turn they charge fees which are substantially lower then traditional payday loan lenders. However, the clause of keeping regular deposit shies away the traditional payday loan borrowers.

The competition and regulatory changes have to an extent made payday loans reasonable to borrow. However, as far as the big gap between traditional conservative lending practice and the more aggressive risk taking practice exists, payday loans will continue to exist in some form or the other.