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The payday loan industry exists to directly meet the need for cash advances and short term loans. These funds are often needed by individuals who rely on their own anticipated resources to pay off the cash advance or payday loan. Since these individuals often lack access to conventional means of credit, such as banks, other entities have developed to meet their needs. The funds provided by these entities are often called cash loans, cash advances, pay day loans, or pay day advances.
The pay day loan industry offers cash advances to consumers at a comparatively high rate of interest. In many states, the "small loan acts" were adopted, which called for higher interest rates for cash advances. These rates typically apply to any cash advance below $3,000. The adoption of this legislation recognized that credit would not be available to many of the individuals seeking guaranteed payday loans unless different financial returns other than those normally permitted were obtainable.
With the advent of
credit cards, the American consumer realized there
was a greater availability for a short term cash
advance and attempted to utilize the “plastic”
to take advantage of that resource. However, various
individuals, due to prior credit difficulties were
shut out from those sources of short term cash
advances. As a result, it led to the development of
the payday loan business. This business is based on
the potential earning capacity of the customer and
does not involve a pledge of collateral. The payday
loan business basically entails an advance against a
future deposit which borrowers promise to
make.
Banks were also uninterested in servicing consumers
who are in need of a short-term cash advance, unless the consumer
could qualify for a credit card or a “cash reserve”
account. Thus, the payday loan business developed as
a natural market phenomenon fulfilling a consumer
need that was not being served by the traditional
financial institutions or by non-traditional
financial institutions under existing laws.
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