If you have never heard of a payday loan, I would highly encourage you to keep it that way. Unfortunately, you may be one of the 10 million Americans who have had to utilize the services of this industry.
Many people might ask, “Why would you need a payday loan?” If you are fiscally responsible and live within your means, this seems like an unnecessary or extravagant commodity. However. The average American has more than $30 thousand dollars of debt and makes between $30 and $55 thousand dollars in annual income. It’s no surprise, then, that 57% of Americans have less than $1 thousand dollars in savings and 40% have NO SAVINGS at all. Lastly, more than 75% of Americans are living paycheck to paycheck.
For people that find themselves in situations where they have an unplanned large expense, one of the tens of thousands of payday loan companies around the corner can seem like a convenient solution. You can even apply online and get an instant response. What is not explained in the fine print is the cycle of debt this locks unsuspecting customers into, more often than not creating problems much larger than the original reason for the loan in the first place.
Why people use payday loans
Debt can come from all kinds of sources and for all kinds of reasons. Unexpected medical, car, and home expenses are just a few examples. American students are piling up $2,858 dollars in student loan debt every second. By comparison, the U.S. national debt is growing at $17 thousand dollars per second. All of these factors mean that some people need access to the money they’ve earned before their paychecks are processed every two-to-four weeks.
This has contributed to a $9 billion/year industry more commonly referred to as payday loans. Generating that much revenue places them eighth behind government services in revenue ($11.7 billion) and just ahead of real estate ($8.1 billion). There are more brick-and-mortar payday loan store fronts than McDonalds (37k) and Starbucks (30k).
The entire concept of a payday loan is to gain access to your paycheck, which on its own is no cause for concern. However, the real issue is that even if you can pay back a payday loan within two weeks, the interest rate is 391.00%. And If you DO NOT pay it back within two weeks, the interest rate could soar as high as 521.00%.
For example, if you were to borrow $100, you would pay back $143.42 in addition to a $10 processing fee in the first two weeks. After two weeks, the interest begins to compound and go up rapidly. This all leads to individuals often being forced to take out another payday loan to pay off the original. And round and round we go, with each payday loan resulting in a black hole of debt.
How Same-Day Pay Can Help
The payroll industry stands uniquely positioned to tackle this fundamental and systematic issue head-on. Many people don’t often correlate “innovation” and “payroll processing” in the same sentence. At Ultimate Software, we believe it’s possible to revolutionize payroll. Can you imagine a world where the moment you clocked out from a shift, your bank account or cash card was immediately credited with the appropriately calculated payroll funds? We can!
Individuals that use payday loans typically cannot afford to pay the astronomical interest rates associated with these types of loans. In some cases you need access to your money immediately. While this may not be the most financially sound practice, sometimes life is out of your control. Ending the cyclical nature and greed of the payday loan industry should be a priority for all payroll companies. Employees are beginning to expect more from their companies. Paying employees the money they have earned immediately after they have earned it as part of same-day pay could be the new normal and a true reflection of a “People First” company.
To learn more about the myriad of factors influencing the future of payroll, sign up for our upcoming webcast, “The Evolution of Payroll,” on Tuesday, September 10th.