Payday Loans — Predatory Lending, Payday Advances, Cash Advance
Written by: Kristy Welsh
Beware of Payday Loans
In recent years, it seems as though there is a "Check Cashing" or "Payday Loan" outlet springing up on every street corner. These predatory lending outlets tend to cluster in low-income neighborhoods, their billboards exclaiming, "Get fast cash until payday!". There are ads on television, the internet, radio, newspaper, bulk mailers... everywhere we turn we see this seemingly fantastic offer to provide us with modest amounts of quick cash that will carry us over until our next paycheck arrives. Another disturbing trend involves utility companies, many of which are turning to these retail outlets to take payments for them: click here to read more about this.
What is a Payday Loan?
Payday Loans are small-dollar, short-term, unsecured loans that the borrower commits to repay out of their next paycheck. These loans are made by storefront lenders, check cashers, pawn shops, even on the internet. The borrower is given cash in exchange for a personal check, which is held for future deposit by the lender. Known also as deferred deposit advances, check or cash advance loans, or post-dated check loans, they have become an incredibly popular method for consumers to obtain quick cash.
Typical loans are for amounts ranging from $300-$700, due on the borrower's next payday, at a cost of $15 to $30 per $100 loaned. This equates to in incredibly outrageous interest rate: 390 to 780 percent annual percentage rate (APR)! Under the Truth in Lending Act, the cost of payday loans (like other types of credit) MUST be disclosed to you in writing (this includes the dollar amount of the finance charge and the APR). So, one might ask, who in their right mind would knowingly agree to a fee this high?
How Payday Lending Works
All a consumer needs to qualify for a payday loan is a source of income and bank account. The borrower then writes a personal check payable to the lender for the amount desired, plus the 15-30% fee. The check will be held for one to four weeks, until the borrower's next payday. At that time the borrower may redeem the check by paying the face value, or simply allow the check to be cashed. If the borrower cannot come up with the money at the end of the term and extends or "rolls-over" the loan, he/she will be responsible for double the fees (or beyond).
Why Would Anyone Choose a Payday Loan?
Borrowers who obtain payday loans generally have credit or cash flow difficulties, and limited other alternatives for low-cost loans. According to industry experts, paying late utility bills, making rent and buying groceries are the top reasons consumers use payday loans. They are easy to obtain, widely available, and appear to be a quick solution for needy consumers. Most payday lenders perform only minimal analysis of the borrower's ability to repay the debt; they generally do not obtain or analyze information regarding the borrower's total level of indebtedness or information on credit history from the three major credit bureaus (Equifax, Experian, TransUnion). Sadly, the ultimate result is that many low-income earners unwittingly take on more debt than they can handle.
What is the Future of Payday Loans?
The payday loan business has exploded exponentially in the last ten years, and it is becoming painstakingly clear that without increased regulation, will continue to proliferate debt in our society. According to the investment firm Stephens Inc., there are approximately 24,200 Payday Loan outlets in the United States, with the industry generating $47 billion in annual fees, including $5.65 billion (or 14%) online. According to sources at the Arizona Department of Financial Institutions (the "home state" for Creditinfocenter), there are 98 different payday loan companies operating 720 branches throughout the state; up from 615 sites only 18 months ago. Add to this equation the online lenders, many of which are based offshore (such as Costa Rica). These lenders are even more difficult to regulate, and may not follow federal or state laws.
Payday lending is currently regulated in 37 states and the District of Columbia. Many states are in the process of attempting to enact legislation that would impose interest rate caps or other restrictions on payday loans. The Federal government has capped interest rates on loans offered to active duty military personnel at 36%. Although this is a step in the right direction, it only helps one subgroup of "victims" of this lending practice. In Arizona, the "sunset" law that permits Payday lending stores to do business expires 7/1/2010. Local Lawmakers recently deadlocked on a Bill (HB 2224) governing payday lending stores in Phoenix, which proposed restrictions such as limiting borrowers to one loan at a time; requiring that lenders utilize a database to confirm applicants don't have existing loans; requiring internet lenders to be licensed by the state; and, giving borrowers the right to repay the loans over a longer period than the original agreement. Although this particular proposal failed, many states are pursuing similar legislation to implement limitations and controls on the payday lending industry.
The payday lending industry has a national trade group called the Community Finance Services Association of America (CFSA). The Community Financial Services Association of America (CFSA) was established in 1999, and according to their website, CFSA is the only national and exclusive advocate for the payday advance industry and its customers. It is comprised of more than 150 member companies representing over half of the estimated 22,000 payday advance locations nationwide. Their site contains information for the consumer, including their (industry) view of the pros and cons of payday advance loans.
Alternatives to Payday Loans
Clearly, the first thing to do is to do your research/shop around carefully when you need a loan!
- Consider credit unions or small loan companies; many credit unions are now offering low-cost short term loan programs as an alternative to payday loans.
- Consider a loan from a friend or family member
- Inquire about getting an advance on your paycheck from your employer, if possible.
- If you have debt, ask your creditors for more time to pay your bills; be sure to ask what fees if any they might charge for an extension.
- Consider a cash advance on a credit card (but ensure you've done your research first).
- Take inventory of your assets, sell something of value you don't feel you need any longer.
- Obtain overdraft protection on your checking account (if you don't already have it) but ensure you read and understand the terms associated with this protection.
- Consider contacting a local consumer credit counseling service if you need help working out a debt repayment plan; many of these services are free or very low cost.
- Compare the APR and the finance charge (including ALL fees) for each credit offer to find the lowest alternative.
- If you absolutely feel you have no alternative but to borrow from a payday lender, ensure that you borrow ONLY what you can afford to pay with your next paycheck and still have enough money to get to the next pay day!!