Just say no to payday loans - here's why
By Devin Anderson
October 16, 2006 | Payday loans, also called payday
cash advances, are short-term loans usually paid by
a personal check held for future deposit or authorization
to electronically access personal checking accounts.
Borrowers' credit is not usually checked and the requirements
are very minimal. If you have a bank account and a full-time
job, you probably qualify.
Payday lenders charge an average of $15-$30 per $100
borrowed and usually loan less than $500. Payday lenders
often like to point out that this fee is sometimes less
than late fees or bounced check fees from banks and
credit cards. Because the term of the loan is so short,
the APR can run in the triple, even quadruple digits.
Payday lending has grown from an $810 million industry
in 1998 to a $45 billion industry annually today. It's
easier to find one of the 22,000 U.S. payday lenders
than it is to find a McDonald's, with only about 14,000
Despite the industry's claims that their service is
intended to cater to one-time borrowers and people with
emergencies, the lenders seem to depend on repeat business
and habitual borrowers. Lenders get a large portion
of their business from people who are desperate and
have run out of alternative options. After taking out
one payday loan and being unable to pay it back, the
need for more loans arises, one high-interest loan being
used to pay back another. On average, payday loan customer
take out 6 to 7 loans per year while more than 20 percent
of the payday industry's customers take out 12 or more
loans a year.
The trouble with payday lending is compounded by the
ability to renew or roll over the principle of the loan.
If you were to take out a loan for $500 at a very typical
rate of $23 per $100, the initial charge would be $115
for an average 14-18 day loan. The problem is that almost
all lenders offer, even some encourage rollovers. A
rollover comes into play when the borrower doesn't have
or doesn't want to pay the now $615 balance. They can
instead pay an additional $115 for an additional 14-18
days. When you take into account that most places (depending
on state law) will allow you to roll the loan over three
or four times, you can have a finance charge of $345-460
from a $500 loan. Keep in mind that this is all considered
one loan. Adding insult to injury, if you are unable
to make any of these payments in full there's a hefty
returned payment charge from your bank as well as one
from the lender.
One would think that people would learn from their
first loan that maybe it's not such a good idea.
All too often people look past the fees and get enticed
in the lure of quick cash. It becomes a vice. Some people
seem to be unable to turn down money that is offered
to them even if they are fully aware of the high costs
attached. Strange as it may seem, people actually manage
to get addicted to payday loans. This addiction leads
to people who live not only from paycheck to paycheck,
but from payday loan to payday loan. Thousands of dollars
are lost in the perpetual cycle of debt.
Once people are caught in the cycle it can become
very difficult to get out. Borrowers most likely wouldn't
have gone with payday loans in the first place if they
were aware of other options. Most people with a tarnished
credit history didn't get to where they are by making
sound financial solutions. Is it any wonder how payday
loans tend to expedite bankruptcy when their customer
base has already proven poor borrow-and-spend habits?
Payday lenders often ride their customers as long as
they can, right into bankruptcy.
So payday loans are often bad for consumers, but are
they legal? The answer is yes, sort of. Payday lenders
are required by law to disclose their outrageous APRs
in print and also verbally if asked. Most lenders do,
Online lenders also have to conform to each individual
state law. This is actually a recent development. Before
laws were changed, lenders could set up shop in a state
like Utah for example, which has very unrestrictive
payday loan laws, and then apply the Utah law to anyone
who took out loans over the Internet. Courts recently
deemed that because the companies had "no physical presence"
in the state, they would have to conform to the individual
state's lending regulations.
Recently the Pentagon released a report criticizing
the payday lending industry for "targeting the military"
in response to the more than 225,000 service members,
or 17 percent of the military, who use payday loans
The solution that was reached is legislation putting
a cap of no more than 36 percent finance charge on payday
loans to military personnel and their dependents. The
new regulation is scheduled to go in to effect Oct.
1, 2007 and would effectively cripple the industry's
ability to loan to the military.
The question has been raised, however, that if this
has been deemed to be a good cap for military, then
why not just apply a 36 percent cap for all lending?
The payday industry, fearing just such an action, argues
that such regulation would be an unnecessary ban on
a service that provides needed emergency funding for
people who use their service responsibly.
Whether you use payday loans or not, whether you support
them or condemn them, there's never a down side to being
informed in your decisions. Explore all of your options.
If you feel that you must take out a payday loan do
whatever you have to do to be able to pay back the loan
in full on your payday. Avoid payday loans like the
plague. Make smart and informed financial decisions
or expect to be taken advantage of.
Payday loans are addictive, dangerous, expensive,
and they ruin lives. Say no to drugs, wear your seatbelt,
and avoid payday loans -- good rules to live by.