Question

A payday loan is a small, unsecured, short-term loan ranging from $100 to $1,000 (depending on the state). Borrowers simply write a personal post-dated check for the amount they want to borrow. A flat fee of $15 for every $100 borrowed is usually charged. The fees on such loans can equate to an annual interest rate of over 390%. Some argue this is an outrageous rate.

On the other hand, the costs of these loans can be less expensive than the other costs the borrowed funds are being used to avoid. For example, the $15 fee might be used to get $100 to avoid a $30 check overdraft charge, a $40 late credit card payment fee, or a $90 charge to reconnect electricity service, which will be disconnected without the money to make the electric payment.

A manager at a payday loan and check cashing business defends his company’s business practice as simply “charging what the market will bear.” “After all,” says the manager, “we don’t force people to come in the door.”

How would you respond to this ethical defense of the payday-advance business?

Answer 1

A payday loan is a small, unsecured, short-term loan ranging from $100 to $1,000 (depending on the state). Borrowers simply write a personal post-dated check for the amount they want to borrow. A flat fee of $15 for every $100 borrowed is usually charged. Here the fees charges is too high for the company.

The fees on such loans can equate to an annual interest rate of over 390%.

So here if it possible for the company to avoid loan amount then it is good for the company.

However, On the other hand, the costs of these loans can be less expensive than the other costs the borrowed funds are being used to avoid. then company should evaluate all the options & select those which is better for the company.

Here in the given case, the $15 fee might be used to get $100 to avoid a $30 check overdraft charge, a $40 late credit card payment fee, or a $90 charge to reconnect electricity service, which will be disconnected without the money to make the electric payment.

In this situation, it is better for the company to take loan to avoid higher cost payment like overdraft charges, late payment fees, etc.

Other OPTION-

If the company is well reputed company and the company has higher capital assets & no loan has been taken on this assets & company is eligible to take the secured loan in these assets, then company should opt for this option.

Reason is that it has lower rate of interest compared to the earlier one and company can avoid the late payment fees, overdraft charges, etc

If the requirement for the company to take a long term loan, then company can take a long term loan on these assets.