I am sure you have seen the late night TV adverts, “Need a few bucks till payday, give us a callâ€. In concept it is an unsecured loan payable in usually less than 14 days. It sounds good, you have a bill to pay but your bank account is dry. All you need is proof of a bank account, and proof of income, and away you go.
Alas Payday loans do come at a price, and in financial terms it is a userous price. Twenty years ago I worked for one of the top ten banks in the US. As a bank they were fine and upstanding, but I worked for the sleazy ‘consumer credit’ subsidiary. Our goal was to offer in store financing for things like Toaster Ovens, the ticket price was $60, but if you didn’t have $60, no problem, you could buy it on credit for $10 a month, and after 12 months you own it! Your $60 Toaster Oven was yours for $120!
Payday loans work very much the same way, of course there are laws that they must abide by, but still staying within the law they can effectively produce a product that is even worse than the Toaster Oven story. Most states limit the interest rates that can be charged, but this is circumnavigated by their fees.
Borrowing $400 will definitely result in a $500 bill two weeks later! When you add compound daily interest, if you did not repay this loan for a year, the total owing would be in the thousands of dollars.
Some people refer to Payday Loans as legalized loan sharking, and indeed it does seem that way.
Several states are trying to curb the industry. Ohio has passed a bill, introduced by Rep. Chris Widener, R-Springfield, on Tuesday, that would cap annual percentage rates on payday loans at 28 percent, extend the repayment period to 31 days from 14 days and cut the maximum loan amount to $500 from $800.
Representatives of the state’s 1,638 payday lending shops have said the House measures would kill the industry, particularly with the APR caps. Payday lenders can charge up to $15 per $100 loaned over a 14-day period, which converts to an annualized 391 percent.
Alexandria, Virginia are also looking at some options. They plan on levying heavy taxes on the Payday Loan (sharking) industry. Of course the Payday Load industry is fighting back. Lewis Wiener (a big wiener in the industry) recently told the council that Advance America, the nation’s largest payday advance lender, would sue the city if it enacts the higher tax.
Wiener said many lenders charge high interest rates. He said that although payday lenders are permitted to charge fees for a $100 loan equal to an annual interest rate of 391 percent, overdraft fees at ordinary banks for the same amount can run as high as 913 percent or 1,329 percent for a bounced check, he said.
“If you want to call us predatory, who’s next?” Wiener said
Umm? predatory? All I have to say to this big wiener is “I’ll loan you $20 and in a year you send me back $80 and we will call it square”. There is a big difference between a large bank and a Payday Loan operation, yes they are both in business to make money, and yes they both want to empty your wallet. But I will take my chances with the bank everytime before I play with the Payday loan sharks.
Simon Barrett
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12 users commented in " Payday Loans – The Good, The Bad, And The Very Ugly "
Follow-up comment rss or Leave a TrackbackDear Simon:
While I can understand your initial aversion to the concept of payday loans, I think you are jumping to conclusions without really understanding them.
Please read www .paydayloanfacts .org.
Then contact me at the private Email to discuss. I’d appreciate the dialogue.
Sure thing. I think this could be quite entertaining.
Simon
It’s easy for people who have nothing to lose to call for a ban. They have nothing to lose. Their jobs aren’t on the line and they have likely never used (or even needed) a payday advance. If this legislation moves through the Ohio senate, Ohioans will be left with fewer financial choices, 6,000+ people will lose well-paying jobs and 1,600 businesses will close and the state will lose tax revenue. I have a hard time understanding why, besides for political reasons, this appears to be a good idea.
It’s not the users of Payday Loans complaining. It’s the self righteous and the politicians. Keno is OK? Right! Win the money to pay for your unexpected car repair. And use the right facts. Would YOU lend $100 to someone you don’t know, with poor credit and $00.00 in their bank account for 2 weeks for $3.96, the proposed rate? I didn’t think so!
Simon
Very miss informed you are, anyone would take your year long deal. It does not work like that. The interest does not keep occurring, you can’t be prosecuted criminally so there is no recourse to use in an attempt to collect and you should see the default rate. basically your loaning money with a hand shake, if you even get that and holding a potentially worthless piece of paper to secure the loan. although profitable its not as lucrative as you might think. You only have one side of the story….Ever been in a position with no where to turn under the circumstance that people utilize this loans for?? doubt it. Since you profile reads your into non-profit why don’t you start helping individuals in need with your resources for no profit? Then we can close the doors on all these places and you can save the world…..
Simon, take your chances with the bank and let them pick your pockets like they do to so many citizens. Oh ya, you probably don’t bounce checks or need a little help between paychecks.
Study Finds 4,547% Interest Rates on Bounce Protection Loans
WASHINGTON, DC – The median interest rate on bounce protection loans is in excess of twenty times that of payday loans, concludes a study by Mark A. Fusaro, Department of Economics, East Carolina University.
The independent study, “Hidden Consumer Loans: An Analysis of Implicit Interest Rates on Bounced Checks,” finds that “Payday lending attracts attention for its high interest rates, but bounce protection loans are much more expensive. When the amount borrowed is low and the time outstanding is short, the effective interest rate paid on this loan can be quite high.”
Fusaro found that “frequent overdrafters can pay fees exceeding $3,000 per year which implies an interest rate in excess of 1,700%. The median implicit interest rate is calculated to be 4,547%.
Mr. Simon Barrett,
So sorry you are so misinformed as some other elitists. But since you yourself never had to use payday lenders, how could you know? But, as one of the editors, you should do your research if you are writing about somthing that you don’t understand.
Point 1. Compounding Interest of Payday Loan:
For example you wrote:
“Borrowing $400 will definitely result in a $500 bill two weeks later! When you add compound daily interest, if you did not repay this loan for a year, the total owing would be in the thousands of dollars.”
Fact is borrowing $400 will result in $460 in two weeks if borrowed at 391% APR. The law says it cannot be compounded. So where does this compounding idea come from? If one does not pay back, it will default the loan,and maybe get sued and still it does not lead to thousand of dollars that Mr. Simon Barret is talking about.
Point 2. Choice with banks
You wrote, ” But I will take my chances with the bank everytime before I play with the Payday loan sharks.”
Wow, you can go to bank to get cash loan or signature loan at a non-predatory rate. How about people without such choice? They suffer from predatory lenders? Subprime market exists because some lenders risk giving out loans (unsecured) to those people who banks do not want to do business with.
Some people do not have a choice like you do. You are so high up there, you don’t even know what people go through when they need to pay bills today and have no money.
Point 3. Confusing Sleazy Consumer Credit Subsidiary with Payday Lenders.
Please do not confuse “sleazy consumer credit subsidiary” with payday lenders. Maybe when you worked for that sleazy employer, they taught you how to deceive customers and not to reveal the true cost of the purchase, but payday lenders make it clear what amount of money one has to pay back, and when. People who borrow from payday lenders are not that stupid people who does not understand its terms. They are doing it because it is a short term solution for paying bills, rather than suffering from its consequences.
Your 391% APR scenario describes the outcome for only the most irresponsible borrowers, who take a whole year to pay a loan that should be paid back in two weeks. With any kind of loan, mortgage or otherwise, if it takes you 12 times longer to pay it back than you promised, you are in the wrong, not the loan.
So ahead and take your big bank, Simon. You have that choice and so should I have the choice to take a payday loan without it being anyone else’s business.
Excellent site. Good work.
I really don’t understand what the problem is. I’m just a normal guy that don’t have any clout, but it’s us that are taking these loans out. I borrowed $300 from cashloancity.com last month to pay for things the kids had to have that week. I paid it back and everyone was happy. Is this nothing more than a political exposure subject? Go after credit card companies if you are serious about high interest and charges. They Charged me $40 for being one day late, and charged me another $40 because the first $40 put me over my limit. Oh but that’s completely alright because of the power they have over Washington right?
Thank you,
Ray
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