Payday loans are short-term loans that are mostly borrowed by the low income population in the United States.
The downside of this kind of a loan is that it has a very high interest rate that can go up to an annual rate of 400 which is more than ten times of an average normal loan given in the States. The loan should be paid by the borrower on the receipt of the next paycheck and has a limit of 500 dollars or less thus not more than that. Normally, the borrower’s credit score is not checked also a collateral is not needed, the only essential requirement is provision of a functioning bank account detail which serves as an evidence of income. Lenders usually encourage more borrowing of these kinds of loans saying that they are an alternative financial access for those people who otherwise cannot have access to emergency loans. Another challenge is that they make the borrower to become a debt slave, because most of the borrowers end up borrowing new loans to pay off older loans which eventually knowingly becomes a behavioral pattern.
According to a financial research that took place in Indiana by Innovations for Poverty Action (IPA), there are only 32 states in the States that approve this kind of loan with 18 states banning it. In 2016 a total of 35 billion dollars of payday loans was borrowed and to it 6 billion dollars was paid as interest and other fees attached. In the 32 states where the loan is allowed, a proximity of 80 percent of payday loans are either renewed or forwarded to a similar loan in two weeks. Additionally, it was discovered that the average income of the borrowers annually was 28,870 dollars and with this an average of 6 the loans was borrowed by each throughout the year. In 2017, the Consumer Financial Protection Bureau made a rule that before a lender approves this loan the borrower’s payment pattern would be keenly check to avoid having too much unpaid loans, unfortunately this rule was overlooked later on in 2019.
The IPA and other researchers did a research and came up with strategies of making borrowers to adapt the habit of paying the loans on time. The strategy that was used is that after a borrower receives the loan, he/she has to fill a survey questionnaire in it two options were given as rewards to the borrower that would be received twelve weeks later. The first was called the incentive reward, that indicated that the borrower would receive cash payment if no loan was borrowed for the next eight weeks, while the other one was called Money For Sure which indicated that the borrower would receive a cash reward with considering his/her future behavior. Thereafter, the borrowers were randomly classified into four categories; incentive, money for sure,flip a coin or comparison.For the comparison group,no reward was offered but for the flip a coin group,there was a chance of winning 100 dollars.