Just say no to payday loans - here's why

By Devin Anderson

October 16, 2006 | Payday loans, also called payday cash advances, are short-term loans usually paid by a personal check held for future deposit or authorization to electronically access personal checking accounts. Borrowers' credit is not usually checked and the requirements are very minimal. If you have a bank account and a full-time job, you probably qualify.

Payday lenders charge an average of $15-$30 per $100 borrowed and usually loan less than $500. Payday lenders often like to point out that this fee is sometimes less than late fees or bounced check fees from banks and credit cards. Because the term of the loan is so short, the APR can run in the triple, even quadruple digits.

Payday lending has grown from an $810 million industry in 1998 to a $45 billion industry annually today. It's easier to find one of the 22,000 U.S. payday lenders than it is to find a McDonald's, with only about 14,000 U.S. locations.

Despite the industry's claims that their service is intended to cater to one-time borrowers and people with emergencies, the lenders seem to depend on repeat business and habitual borrowers. Lenders get a large portion of their business from people who are desperate and have run out of alternative options. After taking out one payday loan and being unable to pay it back, the need for more loans arises, one high-interest loan being used to pay back another. On average, payday loan customer take out 6 to 7 loans per year while more than 20 percent of the payday industry's customers take out 12 or more loans a year.

The trouble with payday lending is compounded by the ability to renew or roll over the principle of the loan. If you were to take out a loan for $500 at a very typical rate of $23 per $100, the initial charge would be $115 for an average 14-18 day loan. The problem is that almost all lenders offer, even some encourage rollovers. A rollover comes into play when the borrower doesn't have or doesn't want to pay the now $615 balance. They can instead pay an additional $115 for an additional 14-18 days. When you take into account that most places (depending on state law) will allow you to roll the loan over three or four times, you can have a finance charge of $345-460 from a $500 loan. Keep in mind that this is all considered one loan. Adding insult to injury, if you are unable to make any of these payments in full there's a hefty returned payment charge from your bank as well as one from the lender.

One would think that people would learn from their first loan that maybe it's not such a good idea.

All too often people look past the fees and get enticed in the lure of quick cash. It becomes a vice. Some people seem to be unable to turn down money that is offered to them even if they are fully aware of the high costs attached. Strange as it may seem, people actually manage to get addicted to payday loans. This addiction leads to people who live not only from paycheck to paycheck, but from payday loan to payday loan. Thousands of dollars are lost in the perpetual cycle of debt.

Once people are caught in the cycle it can become very difficult to get out. Borrowers most likely wouldn't have gone with payday loans in the first place if they were aware of other options. Most people with a tarnished credit history didn't get to where they are by making sound financial solutions. Is it any wonder how payday loans tend to expedite bankruptcy when their customer base has already proven poor borrow-and-spend habits? Payday lenders often ride their customers as long as they can, right into bankruptcy.

So payday loans are often bad for consumers, but are they legal? The answer is yes, sort of. Payday lenders are required by law to disclose their outrageous APRs in print and also verbally if asked. Most lenders do, some don't.

Online lenders also have to conform to each individual state law. This is actually a recent development. Before laws were changed, lenders could set up shop in a state like Utah for example, which has very unrestrictive payday loan laws, and then apply the Utah law to anyone who took out loans over the Internet. Courts recently deemed that because the companies had "no physical presence" in the state, they would have to conform to the individual state's lending regulations.

Recently the Pentagon released a report criticizing the payday lending industry for "targeting the military" in response to the more than 225,000 service members, or 17 percent of the military, who use payday loans The solution that was reached is legislation putting a cap of no more than 36 percent finance charge on payday loans to military personnel and their dependents. The new regulation is scheduled to go in to effect Oct. 1, 2007 and would effectively cripple the industry's ability to loan to the military.

The question has been raised, however, that if this has been deemed to be a good cap for military, then why not just apply a 36 percent cap for all lending? The payday industry, fearing just such an action, argues that such regulation would be an unnecessary ban on a service that provides needed emergency funding for people who use their service responsibly.

Whether you use payday loans or not, whether you support them or condemn them, there's never a down side to being informed in your decisions. Explore all of your options. If you feel that you must take out a payday loan do whatever you have to do to be able to pay back the loan in full on your payday. Avoid payday loans like the plague. Make smart and informed financial decisions or expect to be taken advantage of.

Payday loans are addictive, dangerous, expensive, and they ruin lives. Say no to drugs, wear your seatbelt, and avoid payday loans -- good rules to live by.

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