Most people know Payday Loans are a bad idea. Except for, of course, the people that use them. This weekend I saw one of these places having a free BBQ outside their store, with a decent turnout. I can already imagine the banner: “Pay 600% APR interest, Start your downward spiral into debt, and get a Free Hot Dog!” Anyways, I guess it was just a matter of time before these guys went online. Bankrate.com just ran an article titled ‘Online payday loans: Borrower beware‘, outlining the many pitfalls of online payday loans. Besides the outrageous interest rates and numerous fees, you have:
- You have to give them all your personal information, including name, address, Social Security number, and the routing number and account number of your checking account. The idea is they deposit the loan money in there, and then suck it back up plus fees after payday. But what if they decide to suck more?
- It can be very very difficult to actually figure out where the online lender is located. They can easily be outside the country (and outside the reach of law enforcement).
A good point that one of people interviewed makes is
If you can afford to pay $45 every payday to keep a $300 loan from bouncing, then you can afford to save it so you don’t need to borrow in the future.
That is, if you can pull yourself out the hole that has already been dug. Think my 600% APR interest quote above is exaggerating? It’s standard.
The most common rate of $25 per $100 translates into an annual percentage rate of approximately 650 percent if the loan is repaid in two weeks.
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Just thought you may be interested in reading an article regarding the industry from another perspective:
http://www.fool.com/news/commentary/2005/commentary05080407.htm?ref=foolwatch
Thanks for the link – Anon.
To complete this series, there is a anti-payday post, an pro-payday response, an anti-payday rebuttal, and a pro-payday rebuttal. Interesting points on both sides.
Hi, JP…love your site. For someone not long out of college, you’re going a great job of improving your net worth. Keep it up.
Anyway, when I read your article slating PayDay loans, I just thought it was somewhat ironic (not to mention amusing) that all your Adsense ads on the page are advertising them!!! 🙂
Just because he’s against PayDay loans, it does not mean that he’s against making money from PayDay loans.
Tony Soprano would give you a better deal than that. Probably one or two points.
I recently read a Reuters news article, written by Nick Carey, Mar 23rd, 8:15pm ET, titled, “’Pay day’ loans exacerbate housing crisis”. I would like to clarify that there are some great inaccuracies and bias in this story that really must be pointed out.
I have had extensive experience with pay day loans, and, though I agree that the APR (annual percentage rate) is quite high, and people can get into trouble when they do not use these loans as they are designed to be used, this news report highly exhagerates the cost of a loan. Read from the article as follows;
“A pay day loan is typically for a few hundred dollars, with a term of two weeks, and an interest rate as high as 800 percent. The average borrower ends up paying back $793 for a $325 loan, according to the Center.”
This is not accurate! And there was much more inaccuracy than this in the article.
A pay day loan from a legitimate financial retailer generally costs about $15 for every $100 up to $500. This means that for a loan of $100 for 15 days the charge will be $15, totalling the loan at $115, which must be quoted as an APR of 365%. the actual total pay off for a $300 loan is $345.
In reality it is only a fee that is being paid, not interest. However, government regulations require that it be quoted as interest, as an APR.
The only way that a short-term loan, a pay day loan, could build up to the absorbitent amount qouted in the news story, is if the loan were to be “rolled over”, which is highly illegal in nearly every state that regulates these loans, so, thus, it would be highly improbable that there would be an average of borrowers that pay such amounts.
Pay day loans are for exactly what they are named. A short term small loan to be paid off by the next pay date of the borrower.
These loans have saved many a borrower, in a temporary financial pinch, to pay some bill(s), from much harsher penalties and costs that are incurred by banks and credit institutions if checks do not clear or payments are late.
The proper use of a pay day loan actually shows a personal and professional level of responsibility when it is used properly.
Yes, people do mis-use these loans, people get into trouble, people borrow beyond their means, and there are less than savory lendors who do not do what is right in order to avoid such disasters for their borrowers.
Pay day lendors must exercise great responsibility to protect borrowers and potential borrowers from becoming victims of borrowing beyond their means. That might even mean turning down a less than able and questionably qualified customer from borrowing.
I am disturbed to also hear lawmakers and politicians who are buying into mis-information and threaten the reasonable management and existence of a very useful and helpful service to many people.
Bruce – Washington