Payday Loans

Costly Cash

A payday loan, also known as a payday advance, a cash advance, or a small, short-term unsecured loan, is a method that some people use to get quick cash. But, is it the best technique to obtain needed money? Payday loan businesses think it is.

When you weigh all the facts, there are probably better ways to seek needed money. If payday loans are taken, they should be handled with extreme caution and paid back as soon as possible.

You don’t need much, other than a regular paycheck, to secure a payday loan. Proof of employee records gets you well on your way to obtaining a payday loan. You just need to display payroll stubs or bank statements that prove you currently work at a job and have paychecks coming to you in the future. Sign the paperwork and you get your money with cash due back to the payroll loan business on the day of your next paycheck.

It’s common to pay a charge of $17.50 for each $100 in a payday loan that you’re advanced. So, the procedure is to write a postdated check for the loan, plus service fees.

When the date that’s written on that check arrives, which is usually your next payday, you are expected to return to the payroll loan business and pay your bill in person. If you wish, you can rollover your loan and receive another finance fee. If you don’t pay in person, the payroll lender can cash your check.

In today’s electronic age, the payday application form is usually filled out online. Once approved, funds are transferred to the borrower’s bank account electronically. Then, on the borrower’s next payday, the loan repayment, and the associated finance charge, is electronically withdrawn from the borrower’s bank account by the payday loan business.

Payroll Loan Advantages

Everyday life gives us moments of cash emergencies. A major fender bender might result in a quick need for cash to obtain transportation. A medical emergency might drain the wallet for the money to pay for some quick prescription medication.

If the savings account is empty and a person doesn’t possess a credit card, payday loans provide an option for receiving quick emergency money.

Payday loans also give those who have a job a means to get cash that’s legal. Cities with payday loan businesses possess a lower rate of drug addiction and dependency than locales without payday loan opportunities. Money is available for low-income households. A staff report issued by the Federal Reserve Bank of New York stated that payday loans improve household welfare.

When there is no other source of cash, payroll loans are an avenue to placing emergency funds into a consumer’s hands. Since no credit check is required and all you have to produce is proof of a regular paycheck, payroll loans are easy and simple to get. For some people, they seem like the only answer to getting some emergency cash.

Payday Loans Are Costly

There are many misconceptions the public makes about payday loans. One common fallacy is that they are cheaper than credit cards, which is false. Another mistake made by payroll loan applicants is to look only at the payroll loan’s monetary charge and not at the total annual borrowing percentage when determining their expense. Add up all of the fees and that $500 cash advance might cost you a great deal of money.

For example, a borrower needs to change the tires on the car and borrows $500 in a payday loan. But, it takes four months to save enough money to pay back that loan. In that four-month period, the loan rolled over eight times. On each rollover, the borrower is dinged another 17.5 percent fee. Simple math multiplies $500 by 17.5 percent times eight terms for a total of $700. That’s 140 percent interest over just four months, but when you look at it in an Annual Percentage Rate (APR), it equals 455 percent. Ouch!

The U.S. Federal Trade Commission calls payroll loans “costly cash.” A Public Interest Research Group’s (PIRG) survey of payday lenders revealed an APR of 390 to 871 percent, with an average of 474 percent. Credit card cash advances are considered expensive with finance charges of 35-50 percent, yet they pale in comparison to payday loan APR rates.

Steven Graves, with California State University, Northridge, claims in his piece, National Growth of Starbuck vs Payday Lenders, that in states in the U.S. where payday lending is allowed, payday lenders are more common than Starbucks. Since payday lending establishments often stay open long after traditional banks close, they are an available option often sought out by borrowers.

The common trait among payday loan recipients is to rollover a loan through several pay periods. That’s when payroll loans get even more expensive.

The same PIRG survey of payday lenders mentioned in the above paragraph found that in one U.S. state, 77 percent of all payday loans were rollovers. Customers get caught in a circling toilet bowl of debt that they find hard to remove themselves from.

Most payday loan borrowers have an average of eight to 13 loans per year. And, that’s just what payroll lenders like, because they make good money.

In the U.S., 10,000 payday lenders collect over $2 billion each year in fees and interest. In the UK, 4.1 million payday loans are made to 2.1 million people that generate £242 million of annual revenue. Payday loans amount to 20 percent of all UK lending revenue. Over $1 billion on payroll loans are made yearly in Australia. Annual revenues from payday loans in Canada equal up to $1 billion.

Payday Loan Examples

Mike Donovan is a former district director for Check ‘n Go, the second largest payday loan business in the U.S. In that capacity, Donovan oversaw operations for 20 Check ‘n Go stores located in Virginia, Delaware and Washington, D.C.

Donovan disputes a payday loan industry claim that most payday loan borrowers pay off their loans on time. He says that payday loan businesses get around that technicality by saying if a customer pays back a loan on the due date and turns around and borrows the money right back, that the industry considers that he or she paid the loan on time.

Donovan goes on to say that he trained his staff to keep customers dependent on their store, and to ensure that they kept rolling over the payday loan as either a renewal, or a back-to-back transaction. Donovan says that most all customers are in constant debt for around a year and several customers are in debt for many years.

Bonnie Bernhardt, from Verona, Wisconsin, borrowed $300 from an online payday loan company. After the loan was not repaid in two weeks, a $90 finance charge was electronically withdrawn from her checking account, which was stipulated in the loan agreement that she had signed. In another two weeks, another $90 was withdrawn. Nine pay periods after the loan was made, $810 in fees were removed from Bernhardt’s checking account with the original $300 loan still owed. When she was finally able to pay off the loan, with the inclusion of finance charges and other fees, Bernhardt had a bill over $1,400 for a mere $300 loan.

Rev. Mitchell Kent, a Catholic minister in Columbus, Ohio, received a $100 loan in 2000 to pay a utility bill. He thought the $15 fee was worthwhile for the convenience of getting the cash. He didn’t have the money to pay the loan back in two weeks, so he took out another two-week loan to cover the first payday loan. What Rev. Kent described as a downward spiral involved going from store to store to cover the cost of consequent loans. After two years, he borrowed $2,500 in payday loans. After adding up the fees for all of the transactions and the overdrawn bank fees, due to bounced checks, Rev. Kent figures that the original $100 payday loan cost him somewhere between $5,000-$6,000.

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