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How do I Start a Payday Loan Business?

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  • Written By: Jeremy Laukkonen
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 02 November 2016
  • Copyright Protected:
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    Conjecture Corporation
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If you have decided to start a payday loan business, there are a few different ways to go about it. The most complicated way is to start a new business from scratch, which involves applying for a business license and then determining your interest rates, lending criteria, and other factors. One way to streamline this process is to locate a franchiser and pay for the right to use their name and materials. An even easier way to get in to the payday loan business is to purchase an existing franchise. You will also need to locate your own source of funding so that you will have cash to lend out.

Payday loan businesses tend to deal in high interest, short term loans. The amount you will earn on each loan is typically not that much, but will be very large in comparison to the amount lent and the time until it is paid back. This can be a very lucrative business that also provides a valuable service to people that need relatively small amounts of money to cover monthly bills or rents. The term payday loan indicates that the money is typically paid back when the borrower receives their next paycheck, often within a week to a month from the origination date of the loan.

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The payday loan sector is subject to strict regulations in many areas due in part to the associated high interest rates. One of the most important things you can do when starting your own payday loan business is to research your local laws for maximum allowable interest rates and best advertising practices. If you charge a rate that is too high or use advertising that is considered misleading, you could be subject to heavy fines or other punishments.

Securing a source of funding and determining which people you will lend to are also important factors to consider when starting a payday loan business. Before you open, you will need sufficient cash on hand to meet the demand for loans. You may also want to figure out how you will deal with people that default on their loans and how much of this behavior you can tolerate while still making a profit. This information can help you set guidelines for who to loan to.

Making use of an existing franchise may help you avoid many of the pitfalls associated with starting a payday loan business. The franchiser may have already done much of the research for you, and advertising materials may be provided as well. You may also be provided with information on risk management to help set lending policies. It is still a good idea to do the research on your own, since you will often be liable if there are discrepancies.

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