Federal Trade Commission Release: “Payday Loans Equal Very Costly Cash” at FTC.gov
Credit Unions: Peer Group Comparison-Short-term Credit Products by Chris Tissue, 3/29/10 at Creditunions.com
Written by Hollis Colquhoun
Learn more about Hollis Colquhoun
From Payday to Mayday
Fast Cash, EZ Money, a payday loan may be tempting but don't get sucked in.
A typical payday loan is for 1-2 weeks and is appealing to people who don’t have other ways to borrow in an emergency. For example, let's say you need $250 today to cover your electric bill which is overdue and about to be shut off. You decide to go to the “Fast Cash” payday lender where you post date a check for $300 that corresponds to your pay check ( 9 days away). The lender will give you $255 after taking out a fee and interest charge of $45. On pay day the lender deposits the check to the bank. So far so good, the electric bill gets paid. However, come pay day, other bills are demanding your attention and you don't have enough money in the bank to cover all of them.
Back you go to the money store for another loan. Either you pay back the first loan and ask for another, or you “rollover” your loan for another two weeks, both options will incur a second $45 charge. If your payday loan check “bounces” when the lender deposits it, you will also be charged a “bounced check” fee which is usually around $30, not to mention the overdraft fee of $30 that your bank will charge. Stopping payment on the check or closing your checking account before the check is deposited can cause serious legal consequences depending on your state.
According to a 2009 report by the Center for Responsible Lending, "75% of payday loan volume comes from people who have paid back their initial payday loan but must re-borrow before their next pay period." The report also states that the payday loan industry "churns" or turns over 59 million loans per year which costs borrowers $3.5 billion in fees.
Conveniently, there are also online payday loan companies that allow you to electronically sign a contract giving them access to your checking account to fund the loan. But be forewarned, the internet lenders may be hard to identify (they may be based off-shore) and these loans may be renewed automatically, with fees charged at each renewal. Because internet-based payday loans require personal and bank information you are at a higher risk of fraud and identity theft.
What is really unnerving is that large banks such as Wells Fargo and Bank of America are spending hundreds of millions of dollars to support payday lenders at a time when conventional loan sources have dried up. The big banks are looking for ways to get higher returns. The small borrower is left between a rock and a hard place.
It is a difficult environment to have insufficient income and few borrowing options. Obviously it would be best to keep on top of monthly expenses with a budget and only borrow what you can pay back. However, if you are in a bind, there are credit unions offering short-term loans at an annual percentage rate that is cheaper than a payday lender (although still high). In addition, nonprofit credit counseling agencies can help with budgeting and debt management solutions if you‘re struggling to make payments on personal loans or credit card debt.
Below are some sources of information on payday loans:
Consumer Federation of America, September 2009 Report at Consumerfed.org