Home > Payday Loans > Costly Cash and Payday Loans - Are Payday Lenders a Good Deal?
Costly Cash and Payday Loans - Are Payday Lenders a Good Deal? |
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The ads on radio, television, the Internet and even in the mail promote very high priced payday loans. From check cashers to finance companies, everybody offers small, short-term, high-rate loans with different names. Payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans are some examples. William L Anthes, president of the Colorado-based National Endowment for Education (NEFE), whose mission is to educate Americans on personal finance finds that "Payday lenders literally did not exist 10 years ago, but today their revenues are in the billions of dollars and involve some 10 million U.S. households. It's an extremely profitable business, boasting a 35% return-on-equity. But does it fill a legitimate financial need for consumers, or trap them in a cycle of borrowing and chronic debt? NEFE is concerned that for most people, it's the latter." Typically, the borrower makes a personal check payable to the lender for the amount desired with a fee. The borrower is then given the amount after deducting the fee. Fees for Payday loans can either be a percentage of the check amount or a fee per amount borrowed, like for every $50 or 100 to be loaned. Also the more you extend or roll over the loan, the more fees have to be paid. The Truth in Lending Act requires the cost of payday loans and all other forms of credit to be known. You have to be provided in writing, details of the finance charge in dollars and the annual percentage rate (APR), which is the annual cost of credit. Payday loans, as cash advance loan secured by a personal check, can be very expensive. For example you may make a personal check of $115 for $100 for 14 days. The payday lender or check casher holds the check till the next payday. The lender then either deposits the check or rolls over the check with another fee to extend the loan another two weeks or so. Thus the cost of the initial loan is a $15 finance charge and 391% APR. Three extensions on the loan will increase the finance charge to $60 for a $100 amount. Payday lenders are mostly owned by major corporations but give the impression of being small, friendly storefront businesses dealing in payday loans or cash advances, post-dated check loans or deferred deposit check loans. They cater to people with a job and checking account in need of extra money urgently to pay bills. Payday lenders are mostly found in low-income neighborhoods marked by absence of banks and credit unions. Lenders may have their own storefront, or be set up in grocery stores or gas stations, with some payday loans being available on the Internet as well. Consumers of payday lenders may find it convenient and fast with no questions, no credit check and no hassles. The cost too may be obvious at least on the surface. A customer could write a check for $115 for $100 in cash from the payday lender with the check dated for the next payday. The check is held by the lender till then which makes it appear reasonable enough that $15 is paid for $100 if repaid on time. "Unfortunately, many payday loan customers are not occasional, onetime users who pay $15 for a $100 loan," notes Anthes. "Rollovers, which occur when a borrower can't repay a loan and thus renews it for another one with additional fees, can lead to a vicious cycle of perpetual debt." California has more payday lending outlets than McDonald's or Burger King restaurants. Here the average payday customer may take 11 payday loans in a year. The payday loan customers then pay interest averaging an annual percentage rate (APR) nationally of 474%, as revealed by a 1999 research by CFA and Public Interest Research Groups (PIRGS). A follow-up survey in 2001 by CFA-PIRGS found 33% of 235 payday lenders charged APR over 500% for $100, 14-day loans. Before choosing a payday loan, be sure you know what it's all about. Just because the payday lender doesn't ask the purpose or require a credit report doesn't mean the loan is very private. You will often be asked for pay stubs, bank statements, driver's license and telephone bill. Also the lender could use reporting services like TeleTrack to filter out the high-risk profiles. Realistically speaking, payday lending customers are misled by wishful thinking. Without sufficient money in their checking accounts to make a current payment, they go for a payday loan with the hope of having enough to repay it by the next payday. |
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