{"id":465,"date":"2007-01-14T16:11:57","date_gmt":"2007-01-14T20:11:57","guid":{"rendered":"http:\/\/blogs.law.harvard.edu\/shlep\/2007\/01\/14\/back-again-like-a-payday-loan\/"},"modified":"2007-02-23T19:12:16","modified_gmt":"2007-02-23T23:12:16","slug":"back-again-like-a-payday-loan","status":"publish","type":"post","link":"https:\/\/archive.blogs.harvard.edu\/shlep\/2007\/01\/14\/back-again-like-a-payday-loan\/","title":{"rendered":"back again, like a payday loan"},"content":{"rendered":"

\"emptyPockets\"\u00a0 “Payday loans” must really be addictive (like consumer activists insist), ’cause I couldn’t keep myself from writing about them again today (see our post<\/a> on Jan. 11; update<\/em>, battles everywhere over payday loans<\/a>, Feb. 23, 2007).\u00a0\u00a0Here’s a\u00a0temptingly neutral definition from Payday Loan Times<\/em><\/a>\u00a0(a website that\u00a0is discussed below):<\/p>\n

A payday loan<\/strong><\/a> [or “payday advance<\/a>“] is a short-term cash loan (usually between one and two weeks), issued to consumers. It is expected that the borrower will repay the loan after receiving his\/her next paycheck. Unlike a traditional loan from a bank, there are no credit checks run on the applicant. Loans are usually issued in less than 24 hours, and are around $500. Payday loans can be obtained in person, via fax, or online.<\/p><\/blockquote>\n

In its Feb. 2000 Consumer Alert, Payday Loans = Costly Cash<\/em><\/a>,\u00a0the Federal Trade Commission explains further how payday loans\u00a0work:\u00a0 “Usually, a borrower writes a personal check payable to the lender for the amount he or she wishes to borrow plus a fee. The company gives the borrower the amount of the check minus the fee.”\u00a0\u00a0\u00a0Also called\u00a0cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans, such payday loans are being advertised everywhere (on tv, radio, and the internet) as an easy way to “tide yourself over” until your next paycheck.\u00a0 However, here’s how they quickly become so expensive:<\/p>\n

“Let’s say you write a personal check for $115 to borrow $100 for up to 14 days. The check casher or payday lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check, you redeem the check by paying the $115 in cash, or you roll-over the check by paying a fee to extend the loan for another two weeks. In this example, the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times, the finance charge would climb to $60 to borrow $100.”<\/p><\/blockquote>\n

\u00a0\"blackCheckS\"\u00a0The Center for Responsible Lending<\/a>\u00a0says that payday loans cost American families 4.2 billion dollars<\/a> a year in excessive fees.\u00a0 CRL has a good discussion of possible alternatives to payday loans<\/a>, including “small savings accounts or rainy-day funds; salary advances from employers; credit card advances; working out extended repayment plans with creditors; and loans from friends, relatives, religious institutions, or social service agencies.\u00a0 In addition, many lenders have developed lower-cost alternatives to payday loans that have better repayment terms.”\u00a0\u00a0 Of course, consumers likely to use payday loans often have no prior credit history or an awful one, and can’t turn to sources of credit that middle class Americans take for granted.\u00a0 Industry members and their legislative supporters explain, therefore,\u00a0that they are providing a necessary service at a rate commensurate with the risk they are taking.\u00a0\u00a0\u00a0\u00a0Consumer advocates disagree.<\/p>\n

According to the Center for Responsible Lending<\/a>, 99 percent of payday loan consumers are “chronic borrowers”, who are the most vulnerable consumers, and the loans are structured so that the borrower is consistently in debt to the lender.\u00a0\u00a0 For this reason, there have been calls for tighter regulation from many sources over the past decade.\u00a0 (See, e.g<\/em>., the 1998 article from\u00a0Bankrate.com<\/em>, Officials call payday financing “loan sharking,”<\/a> and last week’s lengthy and useful piece\u00a0“Payday Loans Due for a fall?<\/a>,” Jan. 10, 2007, in the Richmond Times-Dispatch.<\/em>)\u00a0CRL has state-by-state information<\/strong><\/a> on legislation, contacts and news.\u00a0The Center believes that Georgia’s payday loan regulatory scheme<\/a> is a good model for the nation.<\/p>\n

In the last Congress, a bill was proposed<\/a> that would have protected unscrupulous lenders and weaken consumer protections, despite calling itself a The Responsible Lending Act. Many expect the new Congress, with Rep. Barney Frank in the lead, to\u00a0move\u00a0forward with\u00a0genuine\u00a0payday law reforms<\/a>\u00a0at the federal level.<\/p>\n

\u00a0\"blackCheckS\"\u00a0Since October 2006, the federal government has capped interest rates at 36 percent<\/em> on payday loans for military personnel<\/a> – “for security reasons,”\u00a0apparentl<\/a>y because\u00a0a borrower deeply in debt might be too susceptible to bribery and too tempted to commit an act of treason.<\/p><\/blockquote>\n

\u00a0\"thumbUp\"\u00a0 I’m intrigued by the internet journal mentioned above, Payday Loan Times<\/em><\/a>.\u00a0 On the one hand, it admits the transactions are controversial and\u00a0promises<\/a> to “take a look inside the business as never before, providing people with an opportunity to see what is really going on \u2014 and to draw their own conclusions.”\u00a0 It has\u00a0testimonials<\/a>\u00a0that are balanced between pro and con borrowers; its glossary<\/a> of terms is useful; and it presents postings such as “Utah councilwoman focuses on payday advances<\/a>” (Jan 10, 2007), which is an informative look at the campaign of Salt Lake City mayorial candidate\u00a0Nancy Saxton, who wants to limit the number of such businesses in the city.<\/p>\n

\u00a0\"thumbDown\"On the other hand, the most prominent item at the top of every page of Payday Loan Times<\/em><\/a>\u00a0is a large ad in the main column of the website, featuring a lovely, smiling young woman, awash in cash, offering Immediate Loans up to $1000, with links to U.S. states and Canadian provinces.\u00a0\u00a0Also, although\u00a0articles\u00a0under its Advice Category<\/a> include information from sources that are anti-PDL, I’m a bit concerned that the piece<\/a> “Advice for Taking Out Payday Loans” (Dec. 21, 2006)\u00a0starts by saying “Don\u2019t listen to the nay-sayers,”\u00a0and seems to suggest in Tip #2 that you might be able to save money by consolidating high-rate credit card debt into a payday loan.\u00a0 Is your consumer advocate Editor\u00a0too suspicious or rightfully suspecting of the motives behind Payday Loan Times<\/em>?<\/p>\n