I think it’s a good idea to look at another part of the consumer decision tree involving short term credit. It isn’t just price that consumers compare, but also the downside if for some reason they cannot pay the loan back on time.
Borrow from a friend, family member, or employer
Risk: Shakespeare wrote, “Neither a lender nor a borrower be, for a loan oft loses both itself and friend”. Indeed, if a person borrows from a friend or relative and can’t repay them, that relationship could be destroyed forever. Nothing is more valuable, at least to me, than relationships with friends and family. Being indebted to an employer isn’t so awful since he’ll just take the money out from your next paycheck.
Credit Card Cash Advance
Risk: There are two risks. The first is that a consumer takes out a cash advance and only pays the minimum amount each month. Let’s say it’s a 24% APR cash advance rate and the credit card company only requires a 2% minimum payment each month. The consumer might literally pay on this advance for years. The second risk is if the consumer defaults. In that case, it will negatively affect their credit score and these days, credit score is everything.
Risk: If the consumer does not repay their loan before the due date, they forfeit the item they pawned. In the worst case scenario, somebody else buys it and they never see it again. In another scenario, they just buy it back, but for more than they received for the loan.
Bank overdraft fees
Risk: Like a credit card, a person may end up in long-term debt to the bank. The bank may also close the account, which will affect their credit score and make it more difficult to obtain traditional loans.
Installment and Payday Loan
Risk: In the event of default, the consumer is sent to collections. In the worst case scenario, the lender may take the borrower to small claims court, and the consumer be forced to make good on their obligation via wage garnishment. There is no effect on the borrower’s credit score, no collateral is forfeited, and it doesn’t change the borrower’s ability to get a traditional loan.
As you can see, there’s a lot less risk associated with payday loans compared to other products. This is likely another reason why people choose payday loans over other options.