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What is the Most Expensive Legal Form of Credit Available to You?

Written by: Kristy Welsh

If your answer is a secured credit card at 24 percent APR, you are off by a mile. Try getting a payday loan, says Kristy Welsh, author of "Good Credit Is Sexy."

Payday loans, also known as deferred presentment, are currently available in 20 states plus the District of Columbia. They are short-term loans, generally 7 to 14 days, against a post-dated check. In Arizona, this loan against the paycheck you haven't yet earned carries a 15 percent fee. On the average payday loan of $300 for eight days, this 15 percent fee equates to an APR of 459 percent!

The owners of these operations make a payday loan quick and relatively hassle-free. You write a check to the payday loan people for the loan amount plus fees. (In Arizona the loan can be from $50 to $500 and the maximum fee is 15 percent of the loan amount.) You postdate the check to the date of your next payday. They give you cash for the loan amount. You agree to either bring in the cash in exchange for your check or allow them to automatically debit your bank account on your next pay day.

Welsh warns that there are several problems with this arrangement:

First, the fee you pay for the use of this money is exorbitantly high. Think of it this way: by borrowing your pay in advance, you are settling for a 15 percent cut in pay.

Second, if you can't make it through to the next payday without a loan, and you're already spending next week's pay, how will you ever make it through next week without another loan? This can be a vicious, and very expensive, cycle.

Thirdly, it is considered fraud to knowingly write a bad check in many states (including Arizona). This means that on the off chance that you don't reclaim your check on the agreed date, they will deposit it anyway. "Bad check" laws in many states (including Arizona) allow them to take you to civil court for three times the amount of the check plus court fees. If your check bounces, they will charge you an NSF fee of up to $30. Don't forget that our own bank will also charge you an NSF fee. Can it get any more expensive? Unfortunately, it can. They can also prosecute you for fraud, if they are so inclined.

You may be asking yourself how can they legally lend money at such exorbitant interest rates. The legal loophole is to simply call it a fee instead of interest. These fees make them exempt from the standard usury laws that cap interest rates. In Arizona, the legalize reads like this: "The fee charged by the licensee is not interest for purposes of any other law or rule of this state." Arizona (along with 19 other states and the District of Columbia) has given the green light to loan sharking.

One website touting the advantages of opening a loan shop claims an annual return of 805 percent for investors! Their best estimates of the average returns possible for one payday loan store:

Monthly volume for 1 store: 575 checks
Average loan: $300
Average fee: $15 per $100 advanced
Total monthly loan volume: $172,500 ($300 X 575)
Total monthly fee income of one payday loan store: $25,875 ($172,500 X 15%)

Who's fooling whom? If the payday loan shop operator is winning that big on their investment, it's because the rest of us are losing just as big.



Arizona statutes regarding payday lending are available on-line at: For other states, look for your state legislature online under "deferred presentment". For kicks, read what the payday loan industry has to say at:

The most recent CFA/USPIRG report on payday lending, November 2001, is at:

The original CFA/USPIRG report on payday lending, February 2000, can be found at: