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24 hs. loans are known to be probably the most expensive loan products of the financial market in terms of fees and annual interest rate. Though a $100 fee may not seem that high, if that fee corresponds to a $1000 loan which has to be repaid in little more than 30 days, you will easily conclude that these loans are really expensive because we would be talking of at least a 120% annual interest rate. But, what are the reasons that make these loans so expensive?
There are several variables that force the lenders to charge such high interest rate for these loans (not they are not happy to do so). Truth is that though lenders that deal with these loans are often called predators, the costs and risks associated to lending through 24 Hs. Loans justify these apparently abusive fees. The reasons are mainly three: the lack of a credit verification process, the lack of collateral and the terms of these transactions.
Lack of a Proper Credit Verification Process
In order to deliver the amount requested in less than 24 business Hs., lenders cannot take the time to conduct a long credit verification process. That is why there are no credit checks done during the qualification process. Instead, only the presentation of proof of income and residence is required for approval. Sometimes, it is also required for the applicant to have a savings or checking account with a bank or financial institution.
the lack of credit checks turns these transactions into very risky processes and thus, the probability of default increases. In order to compensate for this, lenders have to charge higher rates or fees making all pay higher amounts because of those that will fail to meet their financial obligations. It may sound unfair but the lender has no way to know which one is more likely to default on the loan because there are no credit verifications and thus, the lender needs to average the risks and the costs.
Lack of Collateral: Unsecured Loans
These loans are actually unsecured personal loans and so, they carry no collateral. The lack of collateral increases the risk of the transaction because there is no asset guaranteeing the repayment of the loan. In the event of default the lender cannot take legal action against any specific asset and thus the judicial process for claiming the money invested takes significantly more time and resources.
Short Repayment Programs, Low Amount
The loan terms also contribute to increase the fees because the lender needs to charge for an otherwise non advantageous transaction. The amount of money that is lent is rather small. Payday loans usually provide $1500 at best. This implies that the lender needs to collect the administrative costs and loan generation costs from a small amount. Obviously, when compared to the exiguous amounts lent, these fees are high.
And since the repayment programs are short (two or three installments at most), the fees cannot be spread along a longer period of time which implies that all the costs are concentrated into a single payment or three payments at most. This, added to the two reasons mentioned above, explains why 24 Hs. Loans seem to be so expensive.
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