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The Payday Loan Cycle

Are these short-term, easy-to-get loans an effective consumer service or a debt trap?

Payday loans were established as a quick way to obtain a loan between paychecks. In theory, a customer could take out a loan and pay it back, with an added fee, by the time his or her next paycheck arrived, usually within two weeks. However, some customers and opponents claim that in reality, the use of payday loans has become a form of legal loan sharking, with the lending companies hoping to keep their consumers in debt.

See also: 4 reasons to avoid payday loans

One of the major draws of payday loans is their convenience and ease, most people with a valid checking account can acquire them. Their simplicity has made it possible for close to 19 million American households to use this service annually, spending more than 7 billion dollars solely on fees. Industry representatives claim that their regulated service is a good way to get money in unforeseen circumstances, and that millions of people use payday loans annually to great satisfaction.

Critics of the practice point out that the debt-trap structure of the loan makes it impossible to pay back in a timely fashion, with most customers being in increasing debt for more than six months. The practice is so controversial that many states have outlawed the use of payday loans.

This episode of Inside E Street features Michael Calhoun, president of the Center for Responsible Lending, and Jamie Fulmer, vice president of Public Affairs for Advance America. They hold a panel discussion with Lark McCarthy regarding the current use of payday loans. Also joining Inside E Street is Arizona House Rep. Debbie McCune Davis, who helped prohibit the use of payday loans in her state.

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