Can traditional lenders challenge pay day loans?

23 Jun

or copy the link

Pay day lending has become a substantial industry in Canada.  One argument put forward by those concerned with the high interest rates charged by pay day loan lenders is that if banks and other traditional lenders were to enter the market there would be more competition (and so non-traditional lenders would be forced to lower their rates or exit the market altogether).

Pay day loan lenders argue that the interest and fees they charge reflect the cost of the business.  Traditional lenders, like banks, would say the charges more than cover the pay day lender’s costs.    Is it possible for banks and other more traditional lenders to compete with pay day loan companies such as

What the critics fail to recognise is that it is not just the cost of a pay day loan which is important to the consumer.  The other characteristics of the loan have to be taken into account as well.  If a loan is too slow, inaccessible, heavy with paperwork or just not available at the right time the traditional lenders will not be making the same offering as the pay day lenders.    The convenience of a pay day loan is very important to many borrowers.   Traditional lenders would need to make their facilities available 24/7 online to compete with the larger pay day loan providers.    The application process would also need to be streamlined by those traditional lenders.

Research has suggested that many borrowers use pay day loans even if they have a credit card available.  People are also increasingly aware that borrowing in this way may be cheaper than going overdrawn without authorisation.

A further consideration is credit scoring – If a borrower defaults using a traditional lender it will affect his credit score.  However, defaulting on a pay day loan may not have this effect (although using a pay day loan can enhance a person’s credit score if the loan is paid off on time).

Those who use pay day loan facilities are generally risker borrowers – This means for the lender the default rate is higher.  This is a downside of the industry to the lenders who rarely recover the principle sum on defaulting borrowers.

Many traditional lenders do not wish to offer such loans because they are too risky.  It is difficult to off-set the risk with fees and interest which are below the existing market rate.    Borrowers also appear to prefer the use of pay day loan than a traditional lender citing speed, privacy, hours and location as positives of the pay day loan system.    Therefore, it is not necessarily just the interest rate which determines where a person borrows from.   The other aspects of the loan are also important factors.  Some of the qualitative benefits of pay day loans would be very difficult for traditional lenders to adopt.

Taking all of this into account it seems that traditional lenders are not (at least at the moment) viably able or willing to perform to compete in the pay day loan arena.   They are unlikely to be capable of challenging existing lenders who have specialised in the market, have created a business model and are willing to take the associated risks.

6 Responses to “Can traditional lenders challenge pay day loans?”

  1. Jong August 9, 2013 at 1:14 pm #

    I know about the pay day loans, but want to see what other options there are out there.

  2. Miquel August 9, 2013 at 8:31 pm #

    I’ve been going through some financial difficulties over the past year or so when my partner was unemployed and I had to support him and myself financially, in which I found myself taking out several pay day loans. Although i have always paid them off in the agreement date and in full this has impacted greatly on my credit score and I need to find a way to get back into the green before it affects my entire future.

  3. Arnulfo August 16, 2013 at 3:29 pm #

    I have been in a on going battle with a pay day loan company back in 2011 I applied for a loan I entered all my personal info and was approved but I never authorized the transaction and NEVER got a loan and there is no evidence in my transaction history showing there was ever a deposit of 500 dollars. Soon after I was getting harassing phone calls from middle eastern men saying there is a pending lawsuit against my name and social security number they would call my work call me at all hours from unknown numbers and some known numbers telling me to settle this blah blah.Tell me they would take me to court if I didn’t pay the 500 dollars at first they were nice but then got worse leaving me messages. I finally threatened to sue them for harassment and told them that by law they had to send me a collection notice or court summons proving they were going to sue me they said they would but never have I was sure it was a scam and they were trying to scare me.So today after 6 months of not hearing from them over the course of 2 years. I get a call from a supposedly legit collection agency saying I owe this loan company 500 dollars that I was not being cooperative that they have a record of me getting the money etc. that I can settle now if i can pay 1500 dollars due to interest etc set up a payment plan or go to court and fight it and most likely lose. That I had 24 hours to get back to them before they proceed with legal action, so I am getting my bank to send me all statements from 2011 to prove that I never accepted the 500 dollars. So whats the best course of action?? Im at my wits end and Im going to DORA to file a complaint show I be worried? I haven’t paid them a penny and have no intention until there is proof.

  4. Adam September 17, 2013 at 2:39 am #

    I gave them my checking account number, thats how they deposited it in my account. About 3 days later after them depositing money into my account I had 50 bucks missing from another company. I called my bank and told them the situation, they closed my checking account and opened up a new one. Will the pay day loan service be able to take from my account even thou its new and they have no knowledge of it?

  5. Marg September 18, 2013 at 12:42 pm #

    I am preparing to go back to school in the spring and will be applying for a school loan through a bank with a co-signer. I have a delinquent pay day loan that I haven’t paid off yet and has been sent to a collections agency. I need to know if this in any way will hinder my chances of receiving my school loan.

  6. Christen September 19, 2013 at 4:02 am #

    Is it smart acquiring a $100 -$150 loan that I can pay back at the end of the month from a Pay Day Loan place? And how high will the actual bill be?

Leave a Reply