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Payday loans are a highly controversial financial product, often carrying high interest rates and APRs that are north of 1,000%. However, they act as important anti-poverty measures and serve around 15% of citizens in both developed and undeveloped countries who live week-by-week.

Along with gambling, this product is banned in Israel and we have researched this below to find out why.

What Are Payday Loans?

The payday loan is a specific type of unsecured loan that is designed to last you until your next payday from work. They're used as a short-term fix for financial emergencies - this could be an unexpected medical bill or an unforeseen repair bill for your car.

Payday loans are typically used by those who have a shortfall of cash at the end of the month, so they can borrow money upfront, pay their bill and pay the entire loan and interest on their next pay cheque.

However, these convenient loans are known for carrying very high interest rates because they are used for people who need quick funds. It is not unusual to get a payday loan within 15 minutes or an hour of applying and you are paying a lot for this convenience, but also the interest rates reflect a high default rate at around 20%

They are typically called payday loans because borrowers pay them back after their next payday, with loans often lasting around 2 to 6 week on average. In the UK, the industry was once worth £2 billion and in the US around $35 billion.

What Are The Risks Of Using A Payday Loan?

Payday loans are useful if you find yourself in an emergency and have to get money fast. However this does come with risks. Because they have such high interest rates they are very expensive. Especially if you miss a monthly repayment.

Payday loans are usually used by those with bad credit and the worse your credit, the higher the cost of the loan. Because it is an expensive form of credit when someone misses a monthly payment they then sometimes have to take out another loan to cover the cost - trapping them in a debt cycle that they can't escape.

Failing to repay your loan can also damage your credit history. This can be an issue because it could exclude the borrower from other financial products (mortgages or other loans) in the future.

Why Are Payday Loans Discouraged By The Israeli Government?

Payday loans are beneficial for those who have a stable income and face an unexpected expense. However, because of the downsides, they are viewed quite negatively. Even though they're an easy way of getting money quick, the high interest rates and punishing late fees mean that they can cause more harm than they do good. The Israeli government wants to protect its citizens from these dangers .

Because of this, Usury Laws were put in place in 1957 which severely limits the interest rate that payday loan companies can collect. The Israeli Minister of Finance sets a cap on the maximum interest rate than any one creditor can collect on a loan. This means that Israeli citizens are protected from sky high interest rates on loans.

Are There Any Alternatives To Payday Loans In Israel?

The Israel Free Loan Association is a charitable organization that is a better option for some. The IFLA issues 300 loans per month to families, single parents, big families, scholarship students and small businesses. Throughout their time operating, they've granted over $200 million to over $54,000 people. They also offer emergency and general loans.