In a study conducted by the Federal Trade Commission (FTC), a disturbing profile of payday loan borrowers has been uncovered. The majority of the customers of payday loan companies are those who are already facing many financial difficulties and those who don’t have a strong knowledge about money management. To illustrate, consider these typical situations of a payday loan.

A person who obtains a payday loan is someone who needs quick funds to cover expenses that could not be shouldered by the cash on hand. This person may have a medical emergency and will not be in a position to pay off the payday loan in two weeks. A medical problem usually involves more expenses for several months. These medical expenses drain the pockets of the borrower. At the same time, the payday lender charges fees and interest throughout these problematic months.

In situations such as this, the payday lenders act like leeches draining the much-needed blood of sick people. Some payday lenders might be offended by this analogy but do their online application forms ask for the medical situation of the borrower? Do they first determine whether the borrower has the capacity to pay off the debt? The payday lenders never ask for pertinent information that will reveal the capacity to pay. Instead, they ask for social security numbers, bank account numbers, and copies of a signed check.

A person may also obtain a payday loan because he does not have any other sources of funds. This means that his credit cards may have been maxed out and the wage he receives is not enough to cover the bills and all other expenses. The wiser option would have been to consolidate the debts. Debt consolidation would mean lower interests. Instead, with payday loans, the person enters the trap of paying even higher interests.

The payday lenders don’t care about the borrower’s financial history or credit rating. The borrower may already be way in over his head in debts but the payday lenders are still willing to approve loan applications. With everyday expenses, the amount obtained from payday loans could not help a person pay off debts. Instead, he is in greater debt.

A person who acquires a payday loan is typically someone who is attracted by the convenience of payday loans but does not understand the financial ramifications of this action. Such a person, according to the FTC, is usually young and does not completely understand differences between loan fees and annual interest rates. Payday lenders use the trick of stating the interest rate in terms of amount, such as $15 for every $100 borrowed. But this interest is good only for two weeks. If translated into annual percentage rate or APR, this interest means 650%. It is absolutely higher than the highest APR of a credit card. In less than half a year, the borrower could be paying more for interest than the amount that was actually borrowed.

Based on the situations above and the study conducted by the FTC, payday loans are financial bad news and the payday lenders are similar to loan sharks who prey on people who are considered financially weak. This is probably the reason why payday loans are not considered legal by some states.