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While payday loans have become popular sources of emergency funds, there have been outcries about the high interest rates that loan companies charge for such a short-term loan. These loans only have a duration of 10 to 14 days. Thus, when the effective annual rate is computed, the average rate is 400 percent per year and some may even go as high as 650 percent per annum. Let us take a look at the reasons why payday loan companies charge high interest rates.

The role and risks undertaken by payday loan companies

When you look at it, these companies play a very important role of providing the consumer with much needed cash when there is an emergency expense like someone getting sick in the family or when the computer that is vital for one's livelihood has broken down. Traditional lending institutions, such as banks, are not willing to provide unsecured loans in such as a short time. Because there is no collateral involved, the loan company is therefore undertaking a very high risk for its investment. And in areas where a ceiling had been imposed on the interest rates, most of the companies had shut down.

Are payday loan companies taking advantage of the poor?

There have been complaints that payday loan companies have been taking advantage of the financial needs of low income individuals and families. This perception is mainly due to the fact that their ads are targeted towards people who are in the lower income groups. However, if you look at it closely, this is only natural because these are the people who need payday loans the most. The loan companies would not cater to the rich because they would not be interested in the small amounts that are available with payday loans.

They may offer the much needed cash during a recession.

While traditional lenders are reluctant to offer loans to people who need them the most, payday loan companies may be providing the much needed cash during a recession. It is during these times that available cash is needed the most and payday loan companies have stepped into this role that banks and other traditional lenders have refused to take. Thus, it is really up to the consumer to be careful because there are indeed some loan companies who are damaging the reputation of the whole payday loan industry.

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