How Payday Lenders Survive in a Complex Market
If you are a payday loan customer having borrowed it once or are a regular borrower, it is quite natural for you to get a feeling that payday lenders make huge profits because you are made to pay a high rate per 100 pound borrowed. But having gone through some of the best financial studies and statistics as OFT High Cost Credit Review or IRN research, you will realize that there is a narrow scope for earning profit in payday loan industry. To be more specific, it is a quite hazardous form of finance and a business in which payday lenders often find it hard to meet their operational expenditure.
It does not need common sense for anyone of us to understand that the source of funds which come to payday lenders and get allotted to their customers, are banks. Thus, these lenders owe a considerable interest against the fund they borrow. Whether or not their customers repay the borrowed sum on an exact pay day, payday lenders must pay out the applicable interest to their banks. Therefore this business model is such that as a payday lender, you do the funding first and then hope to see your money coming back in bits and pieces.
Research statistics show that majority of borrowers come from low income brackets and ask for small amounts to the extent 200 to 300 pounds as payday loans, which eventually do not have much of an impact as profit. Moreover, the seemingly high fixed costs they charge from their customers get consumed by way of overheads and operating costs such as office rent, employee wages, electricity bill and many other expenses. Unless borrowers request for £500 or above as payday loans and / or many borrowers take recurring loans, payday lenders have to live with those low profit levels.
In order to elevate their business over and above that survival profit margin, research analysts recommend payday lenders to increase the number of loans they can offer every month as also seek recurring business opportunities from existing borrowers. In addition to that, there is much stress over keeping an eye for funding higher loan amounts, such as to the extend £750. Even if some lucrative offers are put up for those who ask funds over certain limits or to keep borrowers asking for recurring loans, it is worth because that can eventually draw good profit margin for the payday lenders.
Presence of multiple players in payday loan industry results into a stiff competition amongst payday lenders and so, the above recommendations look quite viable.