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.
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.
Great Tweet and post.
ReplyDeleteWells Fargo has a similar catch, taking advantage of people in this poor economy.
If you have a monthy direct deposit from say Social Security, disablity, employment or other fixed source of say $1,000 they will allow you to borrow up to 50% of that or $500 at $1.50 per $20 or $37.50 maximum. The $537.50 is deducted immediately when your next direct deposit check is deposited.
Wells Fargo posts the same identical warnings you mention, Jim, and other banks probably do it on the sly, too. So the pay day loan means big money to those taking advantage of the poor. Like you say, "...good advice, impossible to follow."
--Cliff
Major scam! Takes advantage of the least educated. They are all over Las Vegas!
ReplyDeleteI don't think it is so much an educational factor as it is a financial one. Even a well-educated person having an opportunity of putting food on the table or paying the rent may be inclined to engage in such interest-inflated borrowing if it means avoiding family starvation or eviction.
ReplyDeleteOf course someone with common sense might be wiser to put their things in storage, seek out a homeless shelter and soup kitchens than pay the mafia-like loan sharks.
Often people who take these types of loans believe they have some sort of future money coming that will bail them out. They believe their financial problem is short-term rather than long term. This is often a false hope.
Either way, uneducated or underfinanced, once someone gets involved in this trap it is very hard to escape. In my example, if one were to use the $500 for rent, every month they would pay off the debt and re-borrow with a $37 finance charge reoccurring monthly. That's $450 per year, 100% interest.