Cash Advance: Predatory Lending Can Get You Into Endless Cycle Of Debt |
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Nowadays, the quick-money loan shops offering cash advance loans can be easily spotted on the outskirts of military bases and at strip malls across Washington.
These quick-money loan shops have names like Money Tree, Payday Plus, Money Depot, Advance America, Fast Cash Loans, Payday Plus and the Cash Store. Cash advance loans are the short-term high interest loans, which have grown to be a billion dollar industry in the last decade since Washington legalized them.
Nearly 3 million cash advance
transactions were made in Washington in 2004, the most recent year for which
data is available. But some financial counselors and experts do not advocate cash advance loans for the poor. They consider cash advance loans as more of a predatory lending, aimed at luring borrowers into an endless cycle of debt. One of three cash advance borrowers, according to state regulators, takes out at least 10 such loans a year. Lawmakers are considering several proposals to restrict cash advance lending, including dramatically cutting the interest rate and shrinking the maximum loan. The goal is to make the loans available without letting people get trapped into heavy debt. Companies offering cash advance say that such a proposal would put them out of business and leave people susceptible to onslaught by loan sharks and illegal Internet lenders. With cash advance, a person writes the loan company a post-dated check made out for say, $575, and gets $500 as a loan. This amount includes the loan plus the fees for the services. The customer can reclaim that check by paying back the loan and fees. If the customer is unable to do so, the lender simply keeps and cashes the check. In Washington, maximum loan fees are $15 per $100 for loans up to $500. The fees are on a maximum loan for $700 and can be up to $95. The loans usually have a term of up to 45 days. One of the major complaints about cash advance loans is there fees usually add up to an extremely high interest rate, keeping in mind that most people only need the money for a couple of weeks or even less. The $45 fee on a $300 payday loan for two weeks is the equivalent of an annual interest rate of 391%, which is an exorbitant amount to pay for the service. Truly speaking, people who get the cash advance loans really don't have the ability to pay them back. The companies associated with cash advance loans claim that it is unfair to demote and criticize these loans, as they are a boon for people in distress and in sudden need of money. They argue that the terms and conditions of the cash advance loans are clearly disclosed and, under state law, a loan can be rescinded within the first 24 hours at no cost. It's unfair to suggest as most critics do that the cash advance industry targets particular segments of society. Earlier, it was illegal for a lender other than a bank or a credit card company to charge more than 12% annual interest. But small lenders found loopholes to circumvent the rules. Some would take a post-dated check, give back some money to the client and pay the rest in largely worthless trading stamps. As a result of this, the lawmakers legalized and regulated the cash advance industry in 1995. Two years ago, the laws were amended suitably to give borrowers additional protection For instance; they were now able to rescind a loan free of charge within the first 24 hours. In exchange, the maximum loan was raised from $500 to $700. In recent years, the state regulators have slapped few cash advance businesses. The companies have been largely compliant with the rules and regulations. Now, the proposals that the lawmakers are considering would cut the maximum loan from $700 to $500. The loan interest rate would be restricted to 10% or a maximum of $25. Another proposal would cap the interest rate at 3% a month, or 36% a year. But at just 3% a month, the bills would cut cash advance loan companies' revenue by 30% to 80%. Experts in the field say that these bills are equivalent to prohibition. Washington's $15 per $100 rate is one of the lowest among the 36 states that allow cash advance transactions. In fact, the best solution is probably better financial education at the school level. Experts believe that the root of the problem of money lending and cash crunch amongst people is the habit of mindless spending of money. Regulating or doing away with cash advance industry does not really solve the problem of overspending. It merely complicates things for people as it forces them to search for shady and illegal companies to deal with and get caught in their trap. |
