Payday Loans. What a terrible comment on America’s society when we develop a financial system where those who are struggling to pay 25% interest on their credit cards, and those who can’t afford to have a credit card, end up going to a payday loan company.
When I drive to work in the morning I see the payday loan offices open for business. When I drive home at night the same payday loan offices are open. Some stay open for 24 hours. Each has a full staff on hand. Their offices are spacious, orderly, clean and bright, first class places of business. I will bet not one of their customers has anything that even approaches the cleanliness and spaciousness of these establishments.
I remember hearing spokespersons for these companies advising people not to borrow unless absolutely necessary. I assume this was an effort to get the moral and ethical monkeys off their backs. The spokesperson went on to advise customers to pay back the loans as soon as possible – good advice, impossible to follow.
The adage that if it is a legal business it must be ok to be in that business doesn’t work with me. Not one of us knows what we would do when times get really tough and what we would do to put food on the family’s table. But from the view that I now have, I cannot imagine what a set of dire financial problems would compel me to work in or own such a business.
Let me give you a short description of how these loans work.
The basic loan process is simple and typically takes less than 20 minutes. There is little requirement to get a payday loan. Some verification of employment or income is usually involved (via pay stub and bank statements), but some lenders may even omit this.
LENDERS DO NOT CONDUCT A FULL CREDIT CHECK, NOR ASK QUESTIONS TO DETERMINE IF A BORROWER CAN AFFORD TO REPAY THE LOAN.
The lender provides a short-term unsecured loan to be repaid at the borrower’s next pay day via a postdated check or electronic access to the borrower’s bank account. Borrowers write a personal check for the amount borrowed plus the finance charge and receive cash. In some cases, borrowers sign over electronic access to their bank accounts to receive and repay payday loans.
Lenders hold the checks until the next payday when loans and the finance charge must be paid in one lump sum. To pay a loan, borrowers can redeem the check by paying the loan with cash, allow the check to be deposited at the bank, or just pay the finance charge to roll the loan over for another pay period. But be aware, the process called “rollover” could end up costing the borrower far in excess of the original terms.
PAYDAY LOANS RANGE FROM $100 TO $1,000, DEPENDING ON STATE LEGAL MAXIMUMS. THE AVERAGE LOAN TERM IS TWO-WEEKS. LOANS TYPICALLY COST 400% ANNUAL INTEREST (APR) OR MORE. THE FINANCE CHARGE RANGES FROM $15 TO $30 TO BORROW $100. FOR TWO-WEEK LOANS, THESE FINANCE CHARGES RESULT IN INTEREST RATES FROM 390 TO 780% APR. SHORTER TERM LOANS HAVE EVEN HIGHER APRS.
Payday loans are extremely expensive compared to other cash loans. A $300 cash advance on the average credit card, repaid in one month, would cost $13.99, a finance charge at an annual interest rate of almost 57%. By comparison, a payday loan costing $17.50 per $100 for the same $300 would cost $105 if renewed one time, or 426% annual interest.
Issuers of payday loans defend higher interest rates by claiming processing costs for payday loans do not differ much from other loans, including home mortgages. They argue that conventional interest rates for lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan at a 20% APR (compounded weekly) would generate only 38 cents of interest, which would fail to match loan processing costs.
Critics say payday lenders’ processing costs are significantly lower than costs for mortgages and other traditional loans. Payday lenders usually examine pay stubs, whereas larger loan lenders perform full credit checks and make a detailed analysis of the borrower’s ability to pay.