The payday lending business I. Forces that drive the pay day industry and how to be successful Despite the availability of securing other means of securing short-term loans, such as credit cards and credit unions, payday loan facilities continue to thrive among Americans. The success of the of the payday lender industry can be attributed on two factors. First the ease of putting up the business as it requires minimal capital capital to put up. With an amount of approximately $130,000 as an initial outlay, a branch of a pay lending business can already be put up with a potential of raking in good profits with the kind of interest it charges.
Second is the robust consumer demand which makes pay lending a thriving industry. Among the reasons cited by consumers for prefering pay lending loans are; a) The abandonment of traditional financial institutions from the smaller and short term credit market due to the high cost associated with the structure. b) The exceeding costs of bounced checks and overdraft protection fees, late bill payment penalties and other informal extension of short term credit (pg.
C-113). c) Ease and convenience of availing loans via payday lending companies to cover unexpected expenses (84 percent of those who availed). d) Avoidance of late charges on bills (73 percent). e) Bridge a temporary reduction in income (62 percent). This robust demand from the consumers however has a repercussion among its players because it made the competition stiffer and saturated the market due to the profitability of the industry. To succeed in the industry, as in the case of Allen Franks, a player needs to be competitive by lowering the cost of lending.
It has to cut the mark-up of 15% to just 14% or 13% so it can make itself very competitive compared to its competitors. It is also equally important that a player in the industry should minimize the risk of default from its borrowers. It can be more stringent in its lending requirements to minimize the cost associated with loan default. It can also encourage confidence to entice patronage among its customers by adopting an honest and transparent lending policy such as the Code of Fair Lending put forth by the Alabama Council for Fair Lending Code of Fair Lending. II.
Ethical consideration in the payday lending industry The pay lending industry has been criticised to have usurious interest rates that could amount to a 520 percent APR. It is also being disapproved as a business model as unethical as it take advantage of the needs of others by charging them exorbitant interest rates. Its ethical propriety has been questioned because the interests that consumers has to pay tend to exceed its principal in a very short period of time due to its excessive interest that burdens consumers with debts further. The ethical doubts about payday lending industry however has been clarified by a study conducted in 2007 which reported that the industry favors the borrowers.
It concluded that “individuals taking high-interest loans were less likely to be in poverty, less likely to be hungry or malnourished, and less likely to have lost their jobs” (pg. C-126).