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In this day and age most people live paycheck to paycheck and have to become pretty creative when it comes to stretching their incomes and saving for emergencies and retirement.  For some people payday loans are as necessary as public assistance is to the poor in order to make it through each pay cycle and they have no other alternative to keep their heads above their needs and finances.

While payday loans do have their benefits for those who depend on them they also have their disadvantages for those same people.  Payday loans often have high-interest rates, high fees, lender favored contracts, and sketchy collection practices.  All of the disadvantages have the potential for improvement.

The first area for potential improvement is the interest rates that are charged.
The first area for potential improvement is the interest rates that are charged.

The first area for potential improvement is the interest rates that are charged.  The interest rates charged by payday lenders are often pretty high.  In fact, in some instances they are as high as 400%.

If payday lenders were to lower their rates to where they were only slightly higher than those of banks it would not only benefit their consumers but it would also benefit them by attracting a more diverse group of borrowers.

A reduction in interest rates would affect the profits received by lenders but at the same time it would open new doors for the lenders by widening their potential customer base.

When a potential borrower does an internet search for payday lenders more negative information is available than positive, which is a deterrent for most people needing to borrow money.  However, if the financial terms were updated and changed to be more borrower friendly there is likelihood that more potential borrowers would consider a payday loan more often than just as their last option.

Fees associated with payday loan
Fees associated with payday loan

The second area for potential improvement is the fees associated with taking out a payday loan.  If lenders were to have set loan fees it would better enable customers to determine the cost for them to borrow money and could help them in their selection of a financial institution.

Potential borrowers that are on the fence about payday loans are naturally going to be more skeptical and conservative in their decisions regarding lenders than established borrowers.

Although it is nice for lenders to have return customers at some point these customers are going to have a change in circumstance that either eliminates the need for a payday loan or the borrower’s eligibility for a payday loan.  Therefore, an essential part of a lender staying in business is to bring in new borrowers.  One way that this can be done is by creating a customer loyalty program.

Many lenders already have a referral program in which established customers can receive a discount or free transaction when a new customer is referred and takes out a new loan.  In order to take this program one notch higher lenders could reduce fees and interest rates for loyal customers who have a good payment history with them.

Traditional lending institutions have had these types of incentives in place for years so it’s time that payday lenders educate themselves to the tactics and techniques of traditional lenders and utilize some of the same measures they use to draw in new borrowers.

lender favored contracts.
lender favored contracts.

The third area for potential improvement is lender favored contracts. Payday loan contracts almost always favor the lenders.  The repayment terms for payday loans are often predetermined and pre-set by the lenders with very little input from the borrowers.  Most if not all payday lenders have a one size fit all type of contract meaning that they use the same contract for every customer.

Regardless of whether or not the customer is a new or return customer or the customer’s payment history payday loan contracts don’t vary between good and bad customers. In relation to contracts are the collateral practices of lenders.

The majority of lenders require borrowers to present the lender with either a post-dated check or bank account information in which payment is withdrawn from the borrower’s account on a date chosen by the lender.  Improvements can be made in this area as well by possibly allowing borrowers to choose their own repayment dates or giving borrowers a grace period to repay their loans prior to drafting the borrower’s accounts.  Another possibility would be to allow borrowers to use another form of collateral such as a title, some type of electronic, jewelry, etc.

The fourth area is collection practices.
The fourth area is collection practices.

The fourth area for potential improvement is collection practices. Many lenders are not clear about their collection practices prior to borrowers signing their loan agreements so they are confused when lenders begin collection procedures.

It’s not uncommon for some payday lenders to use tactics such as calling borrowers employers and family members and threatening to have defaulted borrowers arrested.

Although these tactics are not used by all lenders they’re not unheard of. An improvement can be made in this area by making borrowers aware of collection practices prior to signing the contract.

Payday lenders are hero’s to a lot of people who are faced with financial crisis. Although these services are helpful to a lot of people there is a great deal of room for improvements.

Any and all improvements could be beneficial to lenders and borrowers. If payday lenders would consider reevaluating their practices they would be more widely accepted, looked at more favorably, and would make them more competitive with other lending institutions.

Author: George Nathan

George has been a loan advisor for the past ten years. He is the go-to person on all the information about APRs and interest rates. He hopes to gain enough capital to open up his very own online payday lending company in the near future.

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