Home > Payday Loans > Payday Loans: Five Things Lenders Would Never Let You Know
Payday Loans: Five Things Lenders Would Never Let You Know |
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Payday loans are a transfer of wealth from the poor and the poor-risk to the predatory and the powerful. Payday loans are everywhere, and apparently doing a thriving business. But the Federal Trade Commission, the Consumer Federation of America and the Consumers Union have all voiced strong concerns about the payday loans industry. Educated consumers are not payday lenders' best customers, so here are five things payday lenders would rather you not know. 1) The annual percentage rate (APR) charged for payday loans is huge. A typical payday loan is $200 for a term of two weeks with a fee ranging from $15 to $30 per $100 borrowed. The person seeking the loan writes a $240 postdated check and receives $200 in cash. What many consumers do not know is that the $200 loan for two weeks plus fees is at an APR of between 390% and 780%. Payday lenders would argue that a onetime late fee on a credit card is just as high an APR; however, a $30 late fee on a $200 credit card balance is an APR of 178% and, although high, is a much lower rate than average payday loans. 2) State usury laws and regulatory protections may not be able to help you if you get in trouble. Many states have usury laws preventing a lending company from charging exorbitant interest rates. New York, for example has an interest cap of 25% for all loans made within the state. However, lenders are offering payday loans in New York and other states with usury caps and charging the same high fees by purchasing or leasing another bank's usury license from a state without usury laws or with a high usury cap. In addition, national banks charter many payday lenders. The Consumer Federation of America has harsh words for partnering banks. According to them banks continue to play a major role in enabling payday loans chains to evade state usury, small loan and payday loans laws. State-chartered, federally insured banks claim the right to export home state interest rates and to preempt some state consumer protections to be on an equal regulatory footing with federally chartered banks and thrifts. It should be no surprise that working families with temporary cash shortage will turn to high-cost, short-term loans when they simply have no other options. What should surprise anyone is that legalized loan-sharking operates unchecked in nearly every disadvantaged community in the state. 3) Rolling over loans can cost you more than the amount of the loan in fees. Studies show that 75% of payday loans borrowers roll over their loans at least once. Payday lenders are banking that borrowers will not be able to pay their loans at the end of two weeks and will then be assessed another fee of $15 to $30 per $100 borrowed. A recent Georgetown University study reports that one-third of payday borrowers rollover their loans seven or more times, multiplying the already high APR for the original loan to more than 1,000%. 4) Collection techniques are among the most aggressive. Payday lenders lose very little money and make huge profits. Consumer Reports says that by requiring payday loans consumers to turn over a postdated check, consumers are often coerced or harassed by illegal threats or collection practices. For example, they will be threatened with jail for passing a bad check, even though the law specifically says they can't be prosecuted if the check bounces. Consumer Reports even suggests that credit from finance companies such as Household may be better alternatives, with rates of merely 25% to 35% APR. 5) There are other alternatives available even if you don't think so. Before there were payday loans, people dealt with debt issues by negotiating repayment plans with creditors (or using a consumer credit counseling service to do so on their behalf); getting an advance from their employer; getting a small loan from a credit union; using checking overdraft protection as an emergency short- term loan; or going to a legitimate finance company. |
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