Payday loans are offered under various alias: payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans. I will add another alias, “Legalized Loan Sharking”. Loan Sharking is defined as a person who lends money at excessive rates of interest. Unlike Loan Sharking, if you default on a payday loan, you do not have to worry about “Mr. Guido” hunting you down to cause bodily harm. However, the ill effects brought on by Payday loans will bring a black eye to an already bruised checking account.
Payday Loan Companies are one of the fastest growing segments in the Financial Service Industry. Initially payday loan companies set up shop in areas dominated by low-income households. Today you will find payday loan companies located in the suburbs and near college campuses. Many states have usury laws, which prohibit lending institutions charging exorbitant interest rates. As a way to mitigate usury laws many payday loan companies have partnered with national banks that are exempt from such laws. As a result payday loan companies are in every state. These companies focus on branding itself as a helping hand for you during the hard times. Be on the lookout for wolves in sheep clothing! The industry has forecasted $2 billion dollars in revenue this year. Chances are there is a payday loan company coming soon to a location near you.
How does payday loans work?
As long as you have a pulse, you will more than likely qualify for a payday loan. There are no credit checks or verifications done. Qualifying for a payday loan requires only a paycheck stub, photo ID, and a utility bill. You are required to sign a loan agreement and write a postdated check for the amount borrowed plus a fee. Fees for payday loans ranges anywhere from $15-$25 for every $100 borrowed. Upon payday, the lender will deposit the postdated check. For example, you borrow $500 with a fee of $20 per $100 ($20 x 5: Fee = $100). Therefore you write a postdated check for $600. On payday, which is usually two weeks later, the lender will cash the $600 check. The annual percentage rate on this loan is 520 percent. If 520 annual percentage rate is not usury (above legal limits), WHAT IS? There have been rates recorded as high as 2000 percent.
As the old adage says “easy come, easy go”.
In general, people who borrow from these check-cashing companies have exhausted their credit cards and depleted whatever savings they had. They seek payday loans because it is easy to qualify for the loan. Within five minutes you can walk away with money. Note: I mentioned fast and easy. One would think that AFFORDABILITY would be factored into the equation. In most cases borrowers are borrowing money without the means to pay back the loan. When the lender deposits the check, it often sets off a string of bounced checks causing penalties and late charges and NSF fees on other credit obligations. If you do not repay the loan the payday loan companies will take you to court seeking a judgment. As the contract you signed indicates, you will be sued for late charges, interest after maturity and NSF fees in addition to the money borrowed. Many people who do pay back the loan sacrifice payment of another bill. Many others try avoiding penalties by extending the loan term for another 2-week period. The payday loan companies will add an additional fee for granting you the extension. The end result in each case is a never-ending debt cycle.
I view payday loans as throwing money at the symptoms. Many people who seek payday loans have yet to diagnose the cause of needing payday loans. They simply recognize that they need more money and seek payday loan services to pacify the situation. Like all aliments left unchecked it will continue to come back causing further strain to your condition. The symptom in most cases is “Too much MONTH left at the end of YOUR MONEY!” The problem is overspending, no savings, poor money management, and no financial game plan. Unfortunately there is no quick cure. Only TIME and an EXECUTED PLAN will cure your ailment. I will share solutions in upcoming columns.
(Mortgage and Money Coach Damon Carr is the owner of ACE Financial. Damon can be reached at 412-856-1183.)