The Payday Loan Industry: Friends in Need or Foes Indeed?
By: Lisa Laprade
Published: November 2006
What would you do if you went out to start your car for work and found not one, but two flat tires? This week, your entire paycheck has been spent, but you’ll have plenty of extra cash in your next check, which unfortunately won’t be in until a week from Friday. It’s one of those “between a rock and a hard place” types of situations, as you need your car to get to work so that you can collect a paycheck, but without your car tires being in proper, working order, how are you supposed to get there?
The Payday Loan industry and it’s subsidiaries of short-term loans maintain that these types of situations are what they’re in business for- a short-term financial emergency cash advance that can be repaid by the borrower by their next payday in one, single payment.
This is how they work:
You walk into such a cash advance storefront location or log onto one of the thousands of payday loan sites on the net. You supply them with specific information, usually your driver’s license (for verification purposes) and a copy of a recent pay stub. With the information on your pay stub (like the gross and net pay amounts as well as the year-to-date totals, which lets them know how long you’ve been employed), the loan company can decide on a reasonable loan amount. Since the credit report of the borrower is never pulled, the necessary funds can be dispersed quickly and easily- usually within 48 hours.
Many such loan companies allow the borrower to write out a post-dated, personal check to the lender, being certain to include all fees in the total amount. When the loan becomes due, the lender simply deposits the check at hand, puts the proper amount onto the loan balance and keeps the remaining fees. The end.
So what’s all the bad press about?
The fees connected with cash advances and payday loans can seem somewhat harsh to those who oppose the industry (and even to some off those who are for it). The average rate for such a loan is about $17.50 for each $100 borrowed for a 2-week period. So if you borrow $500 for two weeks, your fee will be $87.50, or somewhere in the neighborhood of 750% interest.
Sure, if you look only at the interest rate, it’s a really high fee. But if you calculate other options, such as credit card cash advances in which you pay fees plus interest on the fees until the balance is paid off, or combined bounced check fees, a payday loan really doesn’t seem like it’s that bad of a deal.
The primary reason that our lawmakers are getting involved is because of the many borrowers inability to repay the loan when promised, forcing the loan to “rollover” for another 2-week period, and hence racking up another set of fees. The ongoing process can easily double, triple, or even quadruple to original loan amount, forcing the borrower into a difficult situation. This type of loaning is considered to be Predatory, preying on the people that can afford it the least.
While many states in the US have prohibited payday loans in all of its shapes and forms, many states have simply regulated it, placing caps on the fees charged by such lenders, and deciding whether or not repaying a payday loan can be done with a post-dated, personal check.
As with any time in your life when you’re playing with money that technically isn’t yours, just like credit cards and car notes, be absolutely sure that you can make the payments in full and on time. Common sense and living within your means are still the best ways to keep yourself out of financial trouble.