Pay Day Loans

Payday loans, also known as a deferred deposit service, are loans issued against a paycheck. These are small, short-term loans that typically range from $100 to $500.Find a loan that's right for you at the Loan Center To get one, you write a postdated check for the amount desired, plus a fee. The check casher or payday lender holds the check until you get paid. The typical loan period is two weeks. On payday, you take cash to the lender and exchange it for your postdated check, or you allow the lender to deposit the check. If you do not show up with cash, the lender cashes the check. If you cannot pay back the loan at the end of the two-week period, expensive problems begin. If you ask the lender to hold the loan for another pay period, you pay the fee a second time and the loan rolls over. If you are charged a $20 finance charge on $100, your annual percentage rate is 521%. For many borrowers, this type of loan creates a vicious and costly circle. "Once they've got you hooked, it's really hard to stop," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America in Washington, D.C. Payday lending laws vary from state to state. Some companies have gotten around restrictive state laws by teaming up with national banks that operate under the laws of a different state. "Currently, 35 states allow payday lending," says Sharon Reuss, communications associate of the Center for Responsible Lending, a unit of community-development lender Center for Community Self-Help. "In spring 2004, Georgia enacted a strong law that outlaws triple-digit payday lending. We consider it the strictest." According to the center, a typical borrower of payday loans pays $15 for every $100 borrowed in a two-week loan. That ends up being about a 400% annual percentage rate. "Payday loans are predatory by design, because fees from repeat borrowers are the lifeblood of the business," says Reuss. In 2003, payday lenders serviced between 10 million and 12 million customers. Nearly 40% of the borrowers have an annual household income level of $25,000 to $50,000, and 34% are homeowners. Borrowers must have a job and a checking account to get one of these loans. Before you consider this option, the Federal Trade Commission recommends that you compare the loan fees, interest rate and other costs, of payday loans to other credit offers. Under the Truth in Lending Act, the cost of payday loans must be disclosed.

As a form of sub-prime lending, similar to high interest rate credit cards, payday lending is the subject of controversy. Some critics claim that payday lenders target the young and the poor, particularly those near military bases and in low-income communities, who may not understand the time value of money. Others go further, comparing payday lenders to loan sharks due to high interest rates — typically 300% or more when annualized. Payday lenders have been known to charge more than 1000% APR. There have been reported cases in which payday lenders have pursued criminal bad check charges, despite the fact that they (presumably) knew the check was bad at the time when it was written.[citation needed] Likewise, it is argued that the interest rates on payday lending and on hire purchase contracts unfairly disadvantage the poor, compared to the middle class who pay at most 25% or so on their credit cards. Defenders of the higher interest rates note that payday loan processing costs do not differ much from their higher-principal, longer-term counterparts such as home mortgages. They argue that conventional interest rates at these lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest, which would fail to match loan processing costs. A study by the FDIC Center for Financial Research found that “operating costs lie in the range of advance fees” [collected] and that, after subtracting fixed operating costs and “unusually high rate of default losses,” payday loans “may not necessarily yield extraordinary profits.” Based on the annual reports of publicly traded payday loan companies, loan losses can average 15% or more of loan revenue. Underwriters of payday loans must also deal with people presenting fraudulent checks as security or making stop payments. Payday loan makers also argue that the interest on a payday loan is less than the costs associated with bounced checks or late credit card payments. For example, bouncing a $100 check may inccur an NSF fee from the bank of $28 and a returned check fee of $25 from the merchant. In comparison, when expressed as APRs for two-week terms:

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