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A payday loan won't always pay off
Rapid Cash, a payday loan store in Portland, Ore.
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TEXT OF STORY
Steve Chiotakis: A new law to protect credit-card holders is moving through Congress, and consumer advocates are pushing legislation at the state and federal levels as well. They want to crack down on another source of debt: payday loans. From the Marketplace Entrepreneurship Desk at Oregon Public Broadcasting, here's Mitchell Hartman.
Mitchell Hartman: Cathy Kimpton is a registered nurse with a steady job. I met her outside a Rapid Cash store on the outskirts of Portland. She'd just paid off her husband's latest payday loan.
Cathy Kimpton: Three hundred dollars, but I know I paid nearly $40 for that $300 loan.
If you've never taken out a payday loan, here's how it works. Say you want to borrow $300. You write a personal check for the amount, plus perhaps an interest payment of 15 percent.
That's the extra $40 Cathy Kimpton was talking about. You post-date the check a few weeks to your next paycheck. If you don't come in and pay the debt, the lender simply cashes the original check.
Now, 15 percent interest over a few weeks may not sound bad. But it works out to several hundred percent annually.
Adair Morse at the University of Chicago Business School says there aren't many options for borrowers in trouble.
Adair Morse: People go to pawn shops and car-title loans and things like this, but these all require some assets that you're willing to put up as collateral. It's pretty much after you get capped off on your credit cards, you really don't have much choice but to go to a payday lender.
Lyndsey Medsker: The demand for this type of credit is undeniable right now.
Lyndsey Medsker is a spokesperson for the payday lenders' trade association.
Medsker: You know anecdotally, we're hearing from companies that there are more people walking through the door, there are more people calling. But that's not translating into additional money being advanced. Mainly because part of the requirement is that you have proof of steady income. So as people lose their jobs, they no longer qualify for the advance.
Lenders I talked to say defaults are up significantly -- borrowers bouncing checks or skipping out. So profits are falling.
More than a dozen states, meanwhile, have capped annual interest around 36 percent. Lenders say default rates are so high, anything less than triple-digits puts them out of business.
Uriah King of the Center for Responsible Lending isn't shedding any tears.
Uriah King: Somebody that's paycheck-to-paycheck can't pay off a 400 percent interest-rate loan, plus pay off all their expenses. The payday loan just drives them deeper into the hole.
But finance professor Adair Morse says her research shows most borrowers do understand how much interest they're paying, and don't mind. They like the convenience. Better, she says, to limit how much of a paycheck someone can borrow against, and how many times they can roll the loan over and pile on more interest. That might keep people from slipping into a spiral of debt they can never repay.
I'm Mitchell Hartman for Marketplace.
The arguments for the continued existence of payday loans far exceed the rationale for suggesting that rates be capped at 36% or that the industry should be completely abolished. It's absurd that those with an interest in banking and traditional financial institutions aren't rallying for the elimination of excessive and continuous overdraft fees. Some banks have set up overdraft processes in which they begin to charge customers additional fees for every day their account is negative. Tell me how this is beneficial to consumers? At least payday lenders who are a part of the trade association offer an outlet for financially strapped customers to take care of their debts without accruing additional fees or interest.
Banks have huge debts, but they're getting a helping hand from the federal government. If you have overwhelming debt--perhaps from bad investments, or maybe a job loss, a medical crisis or just plain overspending--you're probably on your own. Check the website http://24hrbreakingnews.blogspot.com'>http://24hrbreakingnews.blogspot.c... to see if they can help. I was also in trouble and I am glad I did check it before I talk to my CC company and it helped - Jane Jim, California
I think we should have the freedom to choose. With that being said payday loans are for people who need to pay a bill in a hurry. With the economy being the way it is right everyone needs to be more responible when it comes to auto loans, credit cards and payday loans. There is a high demand for payday loans right because so many people have lost their jobs and they are down to one person working in the house hold. Things are change people are taking youngs out child care just to save a buck
I think payday loans are a great alternative to the overdraft protection fee of 25-47 dollars for a very short time. And you pay the fee not for 100 dollars but for .01 cents thats bull!!!
On top of that there are 4 dollar or more fees per day, so if you want to use the overdraft protection you better have alot of money to pay off the fees so your not poor by payday. At least we have an option 255 in California for 45 dollars a payday is not bad. "DONT TAKE AWAY OUR FREEDOM OF CHOICE"
Hey Susan Lupton:
While you're here, why don't you address the bogus, methodologically-unsound, biased studies CRL tried to swindle the media with? You know, the slimy "Race Matters" which is misleading, according to Dr. Thomas Lehman, or the one asking about rate caps without providing any context to the question.
While you're at it, glad to hear you think consumers should decide what products they want. Does this mean you'll stop pushing legislation aimed at putting payday lenders out of business.
Self-Help? You bet. They are helping themselves. CRL and Self Help are shady organizations, founded by the Sandlers, who led the nation into its fiscal crisis by pushing subprime loans.
I would like to set the record straight about Self-Help Credit Union's overdraft lines of credit.
Self-Help does not provide ANY fee-based overdraft loans. Instead, we offer our customers an overdraft line of credit that is capped at 18% annual percentage rate, a far cry from the typical 400% annual percentage rate payday loan.
Which product is better? Yes, I'll let the customers decide.
For more information, visit the Center for Responsible Lending's Center for Straight Answers at www.responsiblelending.org.
It's ironic that the CRL/Self-Help lobbies against payday loans based on the APR that is calculated from a fixed fee, yet the credit union's trade organization (CUNA) is lobbying congress that the inclusion of THEIR fees in the APR calculation would distort the rate, and that APR is a poor measure of a short-term loans such as overdraft protection.
Hypocrites? Or shrewd businesspeople who have discovered they can use legislation to eliminate their competition? It certainly worked to Self-Help's financial advantage in North Carolina.
Yet again, a representative for the Center for Responsible Lending (CRL) is espousing hypocritical rhetoric regarding annual percentage rate interest.
Short-term lenders charging $15 per $100 (15% fee) are a lot more economical than the average bank or credit union, (according to an FDIC national study) charging $27 plus interest on an average $36 overdraft (75% fee).
But just for the sake of argument, let's compare the annual percentage rates the way CRL does. A $15 per $100 fee has an APR of 391%, which by the way is unattainable because rollovers are not permitted in most states. However, sevral divisions of CRL's parent organization, SELF-HELP CREDIT UNION, market overdraft lines of credit in North Carolina.
A customer paying the required $25 monthly fee to open a $100 line would be paying the equivalent of 651% in Annual Percentage Rate Interest if they used the full line once and repaid in 14 days - higher if they borrowed less. That customer would pay more than 3,000% APR if they paid the line back in 3-4 days.
Which product seems like a better option for consumers....I'll let your readers decide.
