The short-term credit industry has seen unprecedented growth over the last five years, coinciding with the economic fallout caused by the collapse of major bank lending in 2008 onwards.
Factors Underpinning the Success of Payday Loans
There are many reasons for this surge in popularity, but two main causes stick out; firstly, families are struggling more than ever to make ends meet as a result of the recession.
This has increased the usefulness of short term loans over large, traditional bank loans – after all, if you only need $200 to fix a sudden car problem until your next pay check, a $7k loan to be paid back over five years isn’t the most efficient form of credit. For the most part, banks are not interested in providing an alternative.
Secondly, traditional banks are more stringent on who they lend money to following the creation of toxic debt which came back to bite everyone in 2008. As such, a greater number of people now have no access to credit, or aren’t willing or able to jump through the prerequisite hoops (or have their credit rating affected) in order to get it.
So while the viability of payday loans is clearly here to stay, at least until we properly emerge from the global recession, how much is the short term credit industry actually worth?
The Creation – And Growth – of An Industry
Back in 1990, there were only twelve registered payday advance loan companies registered in the US. Following relaxation of banking laws in many states, this number grew to around 14,000 by 2001.
Today, there are around 21,000 operating storefronts and online across the country. It might be a surprise to hear that while short-term lending is on the up, the amount of companies offering these services hasn’t fluctuated much since 2009. Across the board, how much do these lenders give out in payday loans over the course of a year?
From storefront lenders, $30.1 billion was made in payday loans in 2012 with a further $8.6bn being lent online, totalling $48.7 billion last year. This is up from 2011′s figures ($40.3 billion total) which itself is an increase on 2010′s short term lending ($29.2bn).
On the face of it, these lending figures are astronomical and growing, but the amount of revenue raised by is only a small portion of this – estimates put the total amount of revenue raised by both storefront and online companies at between $7-$9.3 billion for 2012.
Besides operating costs, one of the biggest expenditures for lenders is defaulted payments – these typically range from 10-20% of total revenue, indicating that short-term loans are relatively risky for lenders and, in part, account for the high interest rate applied to payday loans in order to minimize risk.
A Disclaimer on Accuracy
The amount of revenue earned by the industry as a whole is actually a rather difficult number to quantify, and the numbers above may be on the conservative side. This is because surveys only include regulated companies which voluntarily respond to such information requests.
This is problematic particularly because many lenders providing services within the States actually reside outside of them. Often hiding behind registered pseudo-company names and ever-changing online store fronts, it’s not usually clear where a particular company operates or declares their income.
The primary reason for this is usually to avoid US regulatory jurisdiction – one of the most customer-friendly in the world – in an effort to legally flout lending laws. It is, however, important to note that AAAPayDayCash.com is physically based within the US and conforms fully to Missouri and Utah banking laws (the states in which the company is based).
Ultimately, as paydays loans are being increasingly used throughout the country there is a responsibility on both sides of the loan agreement. As lenders, we have an ethical (and legal) responsibility to provide consumers with as much information as they need in order to make a measured decision. And while we don’t judge our customers on any level or stipulate how they use their loan, borrowers have a responsibility to weigh up the information provided before voluntarily entering into a loan agreement of any sort (not just short-term loans).