History

• In 1996, the California legislature passed a law that legalized instant approval loans in that state, and similar legislation has passed in many other states, making it one the the fastest-growing industries in the U.S. Legislators realized that the voters in their states were not being served by the banks--due to mergers, consolidation and restrictive lending policies--and that consumer finance companies no longer were interested in making small, unsecured loans. The instant approval loan industry is now approaching $50 billion, and it has enjoyed about an annual 25 percent growth rate.
  
  

Considerations

• Very infrequently has an issue reached the level of debate of instant approval loans. Proponents of them believe they serve the need for short-term loans for people who have nowhere else to turn; and that the industry, in general, charges a rate of interest that matches their risk .Others believe that the industry caters only to people on the low rung of the economic ladder, and that these loans lead to a high rate of bankruptcy.
  
  

Size

• The majority of instant approval loans are for about $300, and they are paid off in total when they come due. In some cases, either the amount is larger or the customer elects, where he is allowed, to roll over his loan for another two-week period or longer. Many payday lenders charge $15 per $100 borrowed, and it is up to the borrower to find the lowest rate.
  
  

Effects

• Because of the limitations some states have imposed on instant approval lenders, many of them are forming relationships with banks to avoid having to comply with the state's laws affecting what they can charge. This is especially true with banks that are not restricted by the laws of their states. For that reason, Consumers Union is urging the the U.S. Comptroller General and the Federal Reserve to make it illegal for banks to make instant approval loans.
  
  

Potential

• During difficult economic times when people have increasing difficulty making their payments, there will be increased interest in instant approval loans to help them survive financially.