Thursday, November 15, 2007

Payday Loans = Costly Cash

The Federal Trade Commission alerts consumers that Payday Loans = Costly Cash but apparently there is nothing the Federal Government can do to stop exploitation of the working poor, young people starting out, or military people who end up paying the typical 391% APR charged by payday lenders.

A typical scenario is the borrower writes the payday loan provider a check for $115, to be cashed on payday and the loan provider gives the borrower $100 cash.

In the ideal case someone needs money until they get paid and then pays off the loan on payday. It's really not that ideal for the borrower since they are stuck with the 391% APR...but 15 bucks interest on a 100 dollar loan doesn't sound that bad in an emergency situation.

The problem of course is that the people who have to use payday lenders are often not able to cover that $115 check when payday comes up in 14 days and end up with late fees from the payday lender and possibly their bank if the lender attempted to cash the check. They end up in a vicious cycle of extending their 14 day loan for a longer period of time, and that original $100 might end up costing them $390 in interest in a year, plus whatever fees the payday lender charges.

It all depends on how you look at it. Paying 15 dollars to borrow 100 dollars for 2 weeks, sounds okay - but paying 15 dollars every 2 weeks for a year ($390) to borrow that $100 sounds terrible.

It's a lucrative business.

There are 10 of those types of businesses in a 5 mile radius of where I live and they seem to be included as standard features in the new strip malls being built around town.

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