9 February 2014
Myths And Reality Of Payday Loans
Payday Loan Myth #1: Payday loans are extremely expensive and have exorbitant interest rates.
Reality: Payday loans are two-week loans-not annual loans! Industry critics quote the "390% annual percentage rate" to misrepresent the truth and to help make their case. The typical fee charged by payday lenders is $15 per $100 borrowed, or a simple 15 percent for a two-week duration. The only way to reach the triple digit APRs quoted by critics is to roll the two-week loan over 26 times (a full year). This is unrealistic considering that many states do not even allow one rollover. In states that do permit rollovers, CFSA members limit rollovers to four or the state limit-whichever is less.
But, even if the loan was rolled over for the entire year, the high APR of payday loans pales in comparison to the realistic alternatives considered by consumers.
How does a $100 payday loan compare?$100 payday advance with a $15 fee = 391% APR
$100 bounced check with $54 NSF/merchant fees = 1,409% APR
$100 credit card balance with a $37 late fee = 965% APR
$100 utility bill with $46 late/reconnect fees = 1,203% APR.
Payday Loan Myth #2: Payday lenders take advantage of poor people and minorities.
"Payday lenders take advantage of poor people and minorities."
Reality: Critics of the industry have been successfully perpetuating the myth that the payday advance industry exploits the downtrodden. By perpetuating this myth, they have created a warped idea of the industry's customer base. Actually, payday advance customers represent the heart of America's middle class. They are typical hard working adults who may not have savings or disposable income to use as a safety net when unexpected expenses occur.
Here are the facts:
- The majority of payday advance customers earn between $25,000 and $50,000 annually;
- Sixty-eight percent are under 45 years old; only 4 percent are over 65, compared to 20 percent of the population;
- Ninety-four percent have a high school diploma or better, with 56 percent having some college or a degree;
- Forty-two percent own their own homes;
- The majority are married and 64 percent have children in the household; and,
- One hundred percent have steady incomes and active checking accounts, both of which are required to receive a payday advance.*
*Source: The Credit Research Center, McDonough School of Business, Georgetown University, Gregory Elliehausen and Edward C. Lawrence. Payday Advance Credit in America: An Analysis of Customer Demand. April 2001.
If you find a study that concludes otherwise, chances are the researcher combined payday lenders with other financial services such as pawnbrokers, car title lenders and check cashing outlets. These entities are in a different line of business and have a different customer base. All payday advance customers have steady jobs and active bank accounts.
Payday Loan Myth #3: Payday loans trap borrowers in a never-ending "cycle of debt".
Reality: Although the phrase "cycle of debt" is a favorite among industry critics, it's not based on the truth. In states that permit rollovers, CFSA members limit rollovers to four or the state limit-whichever is less. The reality is that a loan cannot be outstanding longer than eight weeks (two-week loan rolled-over four times).
Researchers and state regulators consistently report that 70-80% of customers use payday advances between once a year and about once a month. People who bounce checks and use overdraft protection often do so at a higher frequency. The fact is that a payday advance is more economical than other options.
The data provided here came from the CFSA.