I am sure you have seen the late night TV adverts, â€œNeed 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.