If you're reading this article, then you have probably suffered through a payday loan somewhere in life. This is a bit of derogatory beginning, especially for someone who has defended payday loan companies. Here is the situation with payday loan firms - they have a role in our society. There will always be people who just had their cell phone turned off abruptly by their carrier, or their power shut off by the electric company. Everyday people are always going to have some degree of everyday emergencies. It is as sure as the sun coming up tomorrow. And that's why I have said that payday loan companies should not be villified, because they do provide a service to people. Even if that service tends to be a little expensive.
And that brings me to the topic of the day, which is peer lending. I want to merge the concept of payday lending with the growth in peer lending. Someday the world of payday loans might be evolved into the peer to peer lending format, which would be fantastic. Imagine that instead of a traditional payday loan a customer was able to get a short-term loan from a peer lending company.
This is how it could work. Right now and in the past, if you needed a payday loan you have two main options. Either go online to find one of the dozens (if not hundreds) of payday lenders available or go to the nearest strip mall with a bricks and mortar payday lending store.
The catch is that whether you went to the physical store or to a payday website, you are going to have to pay substantial costs. As in up to 25% - 45% of the loan costs in fees. This is a remarkable situation, especially when compared to the other existing debt formats in our country. Take as examples a mortgage, personal (signature) loan or a home equity line of credit. The APR on all of those products will be much, much less in interest and fee payments than any payday loan out there.
It's almost as if the payday lenders have all conspired and colluded to all have a very high fee schedule.
Another problem is the turn time of the loan. Payday loans are almost always 14 days, once in awhile you can get a 28 day or 30 day loan. But either way, the turn time of the loan is dramatic. You have to repay the loan, with the high degree of interest, almost immediately after you have the money.
So let's summarize. If you have good or decent credit, you can get a personal loan for three or four years, at a reasonable interest rate, let's say under 12%. You will have years to pay the money back and the cost of borrowing the money wasn't that terrible. Now compare that with a payday loan. You will have to pay at least 25% of the loan cost and you will have to repay the money within 14 days or you will be subject to another round of extremely high costs, as in another 25% of the original loan.
There has to be a middle ground.
I believe there is and it will be peer to peer lending. The future of peer lending will be able to provide a match of one person wanting to get a nice return on their money. Say the individual lender wants to make a six percent return on their money in one month. And another person needs a short-term loan that isn't going to break their back for 14 days. A peer loan, or should I say a peer payday loan, would be able to accomplish both goals.
The lender could charge the borrower six percent simple interest for the right to borrow the money for 14 days. The borrower would definitely gravitate to this lender, because the interest rate and overall costs are so far superior to that of the payday lending firms.
This would work for both sides. In fact, this could work amazingly well. To be honest, I'm not sure why there isn't a company doing this already.
The peer payday lender could set-up a simple six percent interest charge to the customer and invite in lenders who would like to make six percent interest on their money every month. This company could even have a set aside fee of say one percent interest charge for fees and another one percent for loans that defaulted.
So the total cost to borrow money for a potential customer seeking a payday loan would be eight percent a month. The firm could allow a few rollovers as well (maybe limit at five) for eight percent each month after that. There could also be a gradual increase to the repayment schedule, so that it doesn't "hurt" as much to repay the original loan amount.
Peer lending is currently available mainly with Lending Club. Prosper Marketplace and Loanio are two firms that were providing peer loans but have currently "gone dark" while they clear up some issues with the government. There was another firm called Zopa that peer loans but it has since left the U.S. market.
As of this writing there is no firm providing a substitute service for payday loans. But with the huge fees and high costs, it only seems a matter of time before some smart peer lender jumps into this market with both feet. Watch to see if this happens. There is a lot of business and a lot of money to be made from this segment of lending. There is no reason the payday lenders, who are all essentially clones of one another, to completely dominate this field anymore.
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