Beware of Payday Loans
The general consensus of financial management experts is to avoid payday lenders at all costs. Many of you may already be familiar with the potential risk to users of payday loans that quickly turn into chronic debt instead of helpful credit. For those of you not in the know, here is a brief run down:
Payday loans are small cash advances, generally $500 or less. A borrower gives the payday lender a postdated personal check to obtain the loan. In return, he receives cash, minus the lender’s fees. The lender holds the check or electronic debit authorization until the borrower’s next payday. At that time, the borrower generally has three options:
Exchanging cash for the original check
Having the lender deposit the original check
Renewing or rolling over the loan, if he is unable to repay. The lender issues a new advance, and uses these funds to repay the prior loan – known as a ‘back-to-back transaction’. In renewal or back-to-back transactions, the borrower gets no “new” money, but pays another set of fees. This is also known as ‘churn’ in the industry. It is important to note: Only 1% of payday loans are made to one-time emergency borrowers.
As a result, payday loan borrowers are often forced to choose between paying the payday lender, paying rent, buying food, or paying for childcare. Some of the facts that payday lenders do not want you to know are:
The cost or annual percentage rate (APR) – particularly once the loan roll overs begin can become astronomical
State regulatory protections, including usury laws, may not apply to payday lenders resulting in little protection for consumers. Other states are attempting to limit the damage done to consumers through the use of payday loans by requiring mandatory “cooling-off” periods before reborrowing or caps on the number of loans per year for each borrower. Indeed, some state legislatures have completely banned payday lenders from doing business in their states.
The collection techniques utilized by the payday loan companies can be extremely aggressive
There are alternatives available such as payment plans with creditors, emergency assistance, or credit counseling
According to payday lender location data, payday lenders target African-American, Latino and Military Communities. As a result, Congress passed the Military Lending Act of 2006 which placed an APR cap of 36% on payday loans to members of the military and their families.
According to research, payday loans result in increased rates of involuntary bank account closure with legal ramifications, other debts going delinquent, the odds of filing bankruptcy double, and greater financial stress. Additionally, evidence show the majority of payday borrowers are not addressing occasional emergencies (as payday lenders advertise) but are actually attempting to address budget gaps caused by recurring, everyday expenses.
Sometimes they are not called payday lenders or lenders at all. Deferred deposit company, or internet service in return for a cash rebate have both been used in advertisements for what really are payday loans.
Who generally uses payday loans?
Those consumers who are:
Low to middle income, including military personnel
Living paycheck to paycheck
Possibly intimidated by large banks
‘Deluded borrowers’ (to quote payday loan researchers, as there is a tendency among those who support these companies to blame the borrower – and yes, some of these companies are publicly traded) who believe they will be able to repay the debt (The average number of times a payday loan is ‘rolled over’ nationwide? – 12.)
New elements in the payday lending industry to be aware of:
Paper free – Many payday lenders no longer hold actual checks as part of their procedure. The borrowers sign up and provide a voided check and an authorization similar to our ACH forms. All future transactions are performed from that information. Additionally, there are many payday lender websites for even quicker on-line access.
Multiple pulls – This allows for larger loans. While any one check/ACH may have a limit on the total amount per transaction, many states have no limits on the number of transactions that can be arranged at one time. If you live in a state with a $500 max per loan, then the company sets up four loans for you and varies the date so that the check/ACH goes through in two weeks, four weeks, six weeks, and eight weeks from the date the client receives the cash. Please note that the client receives less cash for each date as the fees increase based on the length of time the loan is outstanding. Assuming a 35 percent fee assessment every two weeks (17.5 percent per week is pretty standard) the four $500.00 transactions ($2000 total) will net the client $1300. That’s $430 for the two week check/ACH, $360 for the four week check/ACH, $290 for the six week check/ACH, and $220 for the eight week check/ACH. That makes for a total of $700 in fees to get $1300 in short term cash.
Voluntary wage assignments – In response to the unanimous lack of support received by postdated check companies from state authorities when they try to collect on the NSF checks using bad check laws, many companies have by-passed the courts for collection of the debts. Listed among the terms and conditions for the loan is a category called Voluntary Wage Assignment or Voluntary Asset Assignment. This allows the payday loan company to go directly to the borrower’s employer and request that all of their wages not subject to other withholding be directed toward repayment of the debt. Most electronic payday loan sites indicate that you agree to their terms and conditions by entering a social security number. Many borrowers do not realize they have agreed to this. This is voluntary in all states, so by notifying the postdated check company and their own employer by certified mail that they are withdrawing their permission, these assignments can be stopped.
Payday loan cards – Why go through all the hassle of filling out forms or applying on-line? Some payday loan companies are now offering loan cards. These are similar to a debit card. They are pre-loaded with all the borrower’s personal information, banking information, employment information, payday sequences, and current loans outstanding. The borrower can log-on, visit a branch, or use one of the companies ATMs to access cash and it will be issued as a loan on the next non-committed payday. This allows easy access to spend many paydays into the future and, as a result, much higher fees.
On-line access – Few on-line payday lenders provide contact information, such as phone numbers. They often include in their agreements permission for continued access to borrowers bank accounts. On-line access to payday loans is not new. What is new is that the providers of the payday loans are now located off-shore, resulting in borrows disclosing social security numbers and bank information to unknowns. Repayment of these debts may become even more complex when conversion rates, international postage, or funds withdrawals are involved. It also presents a challenge as these companies do not follow U.S. banking and collection laws.
With all this, it seems that the experts’ advice may be right on target – avoid payday lenders. If you’re having problems making ends meet, seek out a credit counselor to assist you in maximizing your income and minimizing your expenses by developing a budget. A credit counselor can also help you develop money management skills that will provide you with more options should financial emergencies arise. So remember – when you’re talking about payday loans, the headache, heartache, and financial complications are simply not worth the trouble.