5 things payday lenders don't want you to know
Payday lenders 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
loan 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 the loan 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 the fact that the $200 loan for two
weeks plus fees is at an APR of between 390 and 780 percent. Payday
lenders would argue that a one-time 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 percent and, although high, is a much lower
rate than an average payday loan.
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 percent for all loans made within the state. However,
payday lenders are offering 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. "Banks continue to play
a major role in enabling payday loan chains to evade state usury,
small loan and payday loan 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."
3. Rolling over loans can
cost you more than the amount of the loan in fees.
Studies show that 75 percent of payday loan borrowers rollover 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 percent.
4. Collection techniques are
among the most aggressive.
Payday lenders lose very little money and make huge profits.
Consumer
Reports says, "By requiring 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 cannot 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-percent
APR.
5. There are other alternatives
available even if you don't think so.
Before there were payday lenders, 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.
Payday loans may not be as bad as prison, but at best
you pay far too high a price for the loan and at worst create a
financial nightmare.
The Debt Adviser, Steve Bucci, is the president
of Consumer Credit Counseling Service of Southern New England. Visit
CCCS
for additional debt
advice or click
here to ask a debt question.
|
