Payday Market and Subprime Lending

Subprime lending is slowly moving into the payday lending market. Like I said above, subprime loans are for people who have flawed or limited credit histories. And these loans generally carry a higher interest rate to makeup for the increased credit risk. Subprime loans are usually involved with insured depository intuitions and are commonly used for auto, mortgage, home equity, and credit card lending. Recently, however, the institutions that are insured have been venturing into the payday lending market.

Payday lending isn’t reported on much so there isn’t an exact record of how many insured institutions are involved with it, but there also isn’t a universal definition of what payday lending is exactly. It varies from place to place, person to person. Nonetheless, the FDIC has conducted surveys that indicate that there are relatively few insured institutions that are currently involved in payday lending. Like I said before, the definition of payday lending can vary dramatically, so what one business considers payday lending, another may have created a different name for it to fancy it up a bit. Some insured depository institutions have implemented forms of overdraft lending programs that may seem quite similar to and exhibit some characteristics of payday lending programs.

These insured institutions that have put themselves in the market of payday lending have created a few different strategies in order to establish a presence in the market. Some have taken the easy route and joined up with companies who specialize in payday lending, while others have simply initiated payday programs within. The insured institutions have implemented extended loans to directly to payday lenders, purchased payday loans from loan brokers, or they have lent to payday specialty lenders and usually in the form of loan participations, warehouse lines, liquidity facilities or dealer lines. There has been no evidence of an established securities market for payday lending, but some insured depository institutions have surveyed the possibility of securitizing and selling payday loans.