Why are payday loans banned in Israel?

  (photo credit: INGIMAGE)
(photo credit: INGIMAGE)

Over time, payday loans have been increasingly regarded as a controversial financial product. They have certainly not been very popular in Israel during recent times, with this article explaining why that is the case. 

What is a Payday Loan?

Payday loans are unsecured loans that usually have quite high interest rates. They are intended to be used as a short term fix for those in need of urgent funds, for instance to cover an unexpected medical bill or an emergency house repair such as a broken boiler. It is aimed at those with a stable income who will be able to repay back the loan once they receive their next paycheck on their forthcoming payday.

Justine Gray from consumer finance platform Dollar Hand explained that “if there is even a small possibility that a borrower may not be able to repay a loan, then they should definitely terminate their loan application or consider borrowing a smaller amount of money that they can afford to pay back”.

What Are The Dangers of Payday Loans?

Whilst payday loans can be useful to help navigate through an unexpected emergency cost, they do come with risks. Payday loans are extremely costly as they typically have extremely high rates of interest. Moreover, payday loans for those with bad credit tend to charge an even larger interest rate due to the bigger level of risk involved. The high cost can trap borrowers in a cycle of debt, especially if they fail to meet their scheduled repayments as they could then face high fees which can further exacerbate financial problems. 

Failing to make repayments can damage the customer’s credit score. This can make it more difficult to borrow in the future, including from traditional credit resources such as a credit card or a mortgage provider. 

It can also lead to a lender attempting to reclaim the borrower’s money through several intrusive methods. They could enforce wage garnishment, where a portion of the borrower’s wage is sent straight to the lender; implement lawsuits or enforce debt collection. Jail time is extremely rare but also a possibility for defaulting on scheduled payday loan repayments.

Why Does The Israeli Government Discourage Payday Loans?

Whilst payday loans undoubtedly have benefits for those with a stable income in need of paying an urgent and unexpected bill, there are a lot of drawbacks which make them deeply unpopular. Despite the fact that they are a convenient way of securing fast cash, the extortionate interest rates and late fees can catch customers out, something the Israeli government does not wish to happen to its citizens.

As a result, Usury Laws are in place through the Interest Law of 1957 which restricts the interest rates that creditors can collect on loans. The Israeli Minister of Finance determines the maximum interest rate that a creditor is permitted to collect on a loan. Accordingly, creditors are prohibited from demanding or charging an interest rate that is higher than this maximum interest rate.

What Is An Alternative To Payday Loans In Israel?

Charitable organizations such as the Israel Free Loan Association (IFLA) is championed over payday loan companies. The IFLA provides over 300 interest free loans each month to big families, single-parents, families with handicapped children, new immigrants, students and small businesses to name a few, amounting to over $200 million worth of loans to over 54,000 people. Better yet, the association also offers general and emergency loans. 

This article was written in cooperation with Tudor Lodge Digital