Image for Introduction to Predatory Lending

Introduction to Predatory Lending

(1 of 7)

What's behind payday loans, and why do they attract so many users and so many critics? Let's find out.

What you will learn

  • What Is Predatory Lending?
  • How Do Payday Loans Work, Who Uses Them, and Why?
  • Advantages and Disadvantages of Payday Loans
  • How Expensive Are Payday Loans?
  • Should Payday Loans Be Avoided?

What do you know?

Introduction to Predatory Lending

You have probably seen the cash-advance shops (commonly referred to as payday loans) in certain parts of town. They advertise fast cash for people who need it right now. Their signs are bright and colorful and easy to see, and there are thousands of them all over the country. While they can indeed provide fast cash, they can also cause fast problems if you don’t understand how they work. Payday loans are the subject of a lot of criticism.

The average payday loan borrower ends up in debt for nearly six months with an average of nine payday loan transactions, according to the Center for Responsible Lending. This is because of the very high fees that are charged. More than 12 million Americans every year take out at least one payday loan.

With regard to the very high fees, there are offerings that are similar to payday loans. They include title loans, rent-to-own loans, pawnshop loans, and many similar ones. They all work in a similar way.

Currently, two-thirds of the 50 states explicitly allow payday lending of some kind. So what’s behind payday loans, and why do they attract critics and government regulation? Let’s find out.