Internet Payday Loans

Payday Loans: The Controversial Issue

A payday loan is a short-term loan with a high interest rate. Here's how a payday loan works:

A consumers writes a post-dated check to a payday lender and receives a cash loan. The lender makes money by adding a fee which is included in the total amount to be repaid when the borrower gets his or her next paycheck. The payday lender does not extend credit to the borrower.

Payday loans are also know as cash-advance loans, check-advance loans and post-dated check loans.

History of Payday Loans

Many states in the US have usury laws. These laws forbid interest rates from exceeding a certain APR (varies by state.)

Passed in July 1996, Senate Bill 1959 opened the door for payday loans. The justification was that there was a need for small emergency loans with no strings attached. Many banks were closing during this time due to merges, making it difficult for consumers to acquire bank services. Banks were not interested in originating $100 -$500 non-secured loans.

Payday loan companies have successfully gotten around usury laws in many states by establishing relationships with nationally charted banks based in payday-loan-friendly states where usury laws either don't exist, or exist but are lax.

Statistics

The Center for Responsible Lending claims that 91% of payday loans are used by people fast-cash borrowing five or more times per year. In 1990, there were 12 payday loan companies in the US. By 2001, there were 14,000. In the United States, payday loan companies account for approximately $5 billion of economic activity each year, often at the expense of the financially vulnerable individuals and families.

Payday Loans: Positive Aspects

• Quick and Easy

  The loan process consists of a short application with relatively easy qualifications. If money is needed to pay a bill today, a cash-strapped consumer can pay an important bill within minutes of walking through the doors of the payday lender’s office (or, the case of an online application, cash is usually wired into the borrower's bank account and is accessible the next business day.)

• When Banks and Other Lenders Say No...

  Though payday lending is often vilified as legalized loansharking, many consumers who have exhauster all other options can get access to emergency cash from a payday lender, cash that can be used for food, life-saving drugs or a rent payment. Bottom line: it's easy to be a critic when you don't have an eviction notice on your door and your family is well fed.

• No Credit Check

  The process of obtaining a payday loan only requires an active checking account, a job with a minimum monthly income, and proof of residence. A typical loan from a typical bank often involves hours of filling out long application forms, information verification and basing your creditworthiness on your credit score.

• Apply Online

  Some payday loan companies offer the convenience of applying online. The money can be deposited into your account the next day without any hassle or ever having to leave home. Compared to other financial transactions, like making credit card payments online, payday loans are actually quite secure.

• Extendable

  In the event that financial constraints prevent a borrower from paying back the loan by his or her next payday, many payday lenders allow borrowers to extend the term of the loan. This is also called "rolling over" the loan.
  

Payday Loans: Negative Aspects

Payday loans are negative in the following ways:

• High APR’s and Interest Rates

  Interest rates on payday loans are invariably much higher than 100%. For example, a $100, two-week payday loan with a $15 charge will yield a 390% annual percentage rate (APR.) The APR’s and interest rates associated with payday loans are typically much higher than loans offered by traditional banks and credit unions.

• Short Repayment Time

  A two week repayment period is typical for a payday loan; some offer a four week repayment term, so as to accommodate employers who pay on a monthly basis. If the borrower experiences financial hardship within the two or four week repayment window, or is simply an irresponsible borrower, he or she is still expected to repay the debt in full. Late fees can accumulate and make the loan double or triple the original loan amount. Unlike bank loans that offer several months to several years to pay back a loan, payday loans have short repayment times.

• Addictive and Dangerous

  Payday loans are extremely convenient, easy to obtain and easy to rollover (rolling over is when a borrow extends or renews a payday loan.) It's easy for a borrower to get hooked on payday loans and get stuck in a virtually insurmountable debt trap. This can easily snowball into a mountain of high-interest debt.

Payday Loan Reform Act

The Payday Loan Reform Act was passes on February 26, 2009 to amend the Truth in Lending Act requiring additional disclosure requirements and other protections for consumers. The stipulations of the Payday Reform Act follow the last section of the Truth in Lending Act. Here are a few highlights:

No lender can make a loan to a consumer unless:

• Consumer is provided with a copy of the agreement.

• A clear description of the loan terms is provided.

• The name, address and phone number of the loan company are provided as well as the name and title of the employer signing the agreement.

• A warning of the loan cost must be provided (in at least 14-point bold-faced type).

• Credit counseling availability (in at least 14-point bold-faced type)

• No criminal prosecution or security interest for loan repayment

• Interest-Free Extended Payment Plans

Lawmakers believed that lenders were providing deceptive information to consumers. Congress felt that if consumers had a clear understanding of what they were getting into, they would not renew their loans.

New Rules

New rules, as a part of the consumer protection agency currently being constituted by Congress, aim to protect families from predatory practices perpetrated by all types of financial institutions. The federal agency will protect individuals and families from financial abuse, and will investigates the financial marketplace on their behalf. If created, the new financial protection agency will be responsible for setting forth consumer-friendly terms, policies and language regarding mortgages, credit cards, auto loans, overdraft fees, financial literacy and alternative financial services. Proposed rules that would affect payday lenders include:

• limiting borrowers to 6 payday loans in a 12-month period,
  
  
• requiring payday lenders to extend the repayment period if the borrower is not able to repay a loan as agreed,
  
  
• forbid the sale of any other products or services at the payday lender's place of business.

Payday Lending Stats

Statistics indicate that payday loans target minorities. 51% of those who use payday loans make less than $10,000 per year. 53% of payday loan users are Blacks and Hispanics. The Southwest Center for Economic Integrity reported that 83% of payday loan companies are located less than one-fourth mile from high/medium stress areas as opposed to 69% of banks and 56% of credit unions.

The Bottom Line

There are an equal number of risks and benefits with payday loans. The important thing is to borrow responsibly if you have no other options. Before going to a payday lender for a loan, ask friends or family for help. Another option many overlook is getting assistance from their church, mosque or synagogue. Sell stuff on eBay or to a pawn shop.

For help with all kinds of debt, visit the www.DebtHelp.tv website.

A payday loan is a short term loan that is taken out for the purpose of “making it through until payday”. These loans are generally taken out by lower income workers who find themselves in a situation where one paycheck does not last long enough to make it to the next pay day.

The concept is very simple. A borrower gets paid every fortnight. In between pay days, cash from the borrowers last paycheck wasn't enough to cover his or her lifestyle, leaving the borrower short. The borrower will be asked to produce income documentation, usually a paycheck stub and perhaps identification and a utility bill to prove their address. There is a simple loan application and possibly verification of employment. If approved, the borrower will receive cash that day, or the next business day, depending on when the approval actually happens. The loan is then repaid when the borrower receives his or her next paycheck. It is not uncommon for the lender to have the borrower write a post dated check that will be deposited on the payment due date.

A payday loan can be an attractive way to get through a crisis in between pay checks. If used properly, and not abused, it can be a good tool for some people. Unlike other types of loans, there is no waiting time; payday loans offer virtually instant cash. In a lot of cases, poor credit or not having a bank account is not an issue, so these loans are perfect for the unbanked. The borrower does not need a co-signor or collateral.

Payday loans are generally made in an amount so that the payoff is not more than the borrower’s next paycheck -– including the interest and fees. Most payday loans are in the range of $300-$500.

These loans, like a power saw, are excellent tools meant for a very specific purpose. Also like a power saw, however, these tools can hurt you very badly if not used correctly.

The first obvious danger in taking out a payday loan is that the borrower may have to use their entire paycheck to repay the loan. In which case, of course, there is no money until the next payday; unless the borrower gets quick cash via another payday loan.

Another drawback to this type of loan is the interest rate, which is normally extremely high. Because laws vary from state to state, it was difficult to find an average rate. In Washington state, where the rate is regulated by law, interest rates can be as high as 60% APR. In other states, the annual percentage rate can be between 300% and 400%. Some examples of annual percentage rates have been found to exceed 1,000 percent. With a typical payday loan of $325, a borrower can expect to pay back $793. These astronomical interest rates make it very difficult to, if not impossible to, repay the loan if the original due date is missed.

The high interest rate problem brings up another issue that becomes a major problem for payday loan borrowers; the rollover. A rollover occurs when, instead of paying off the loan on the due date, the borrower makes an interest payment and extends the loan period. There is usually another fee charged, in addition to the interest, on the day that the rollover is made. The rollover can be an attractive option when the loan cannot be paid in full.

Payday loans are made in person at payday loan stores, check cashing stores, and pawn shops. Some rent-to-own companies also make payday loans. Loans are also marketed via toll-free telephone numbers and over the Internet.

The online market has been growing rapidly, with the most up to date figures placing the market at $7.1 billion per year. The requirements for obtaining a payday loan online are generally quite lax. Typically, the borrower must:

• be at least 18 years of age,
  
  
• have an open checking account that has been in use for at least 90 days and shows deposits of $1000 each month,
  
  
• have a telephone,
  
  
• be employed.
  
  

When an online loan is approved, the funds are wired to a bank account provided by the borrower. At the time the loan is approved, the borrower grants permission to the lender to automatically withdraw loan payments. Unless other arrangements are made to extend the loan, loan payments will occur automatically on the designated day. The borrower needs to make sure that his or her bank account always has sufficient funds to cover any and all loan payments. If not, additional fees and bank penalties will almost certainly be assessed. Extensions and rollovers usually incur additional fees for the borrower.

Payday loans are illegal in fifteen states and Washington D.C. All other states have laws that place limits on interest rates and the collection activities of payday lenders. When applying for a payday loan, the borrower is advised to investigate the laws of their own state and to make sure that they fully understand all of the interest rates and fees.

Laws regulating payday loans vary from state to state. There is federal legislation that governs payday loans. The Truth in Lending Act requires that the lender provide, in writing; the annual percentage rate, the payment schedule, the amount financed, the total number of payments, and any late payment fees. In 2007, the Military Authorization Act made it illegal to make payday loans to members of the United States Military.

Bottom line: payday loans offer easy access to fast cash and lightning fast approvals. The drawbacks are the high interest rates and fees, and the ever looming menace of the payday loan rollover. The payday loan centers do not provide financial advice or guidance when making loans. It is up to each individual borrower to examine their own financial situation and fiscal discipline and decide if a payday loan is right for them. As that ancient saying goes: caveat emptor (or, perhaps, caveat borrower.)

To get help with debt, visit the www.DebtHelp.tv website.

According to CareerBuilder.com, a whopping 61% of American households lived paycheck to paycheck in 2009. That number is huge, especially since only 49% lived that way in 2008, and only 41% in 2007. Whether it is due to losing one or both household incomes or simply a reduction in the household incomes, the statistic is staggering. With families not able to adequately save for any unexpected expense that may arise, they are finding that more often than not there is more month than money. So what happens when the rent/mortgage payment is due, groceries need to be purchased, and then the car breaks down? For some, a small personal loan at a local bank is all it takes to get back on track. For many though, this isn’t an option, and the only place they have to turn is payday lending, which may sound like a good idea up front, but in the long run can sink you deeper than you were before.

What is a Payday Loan?

At its simplest, a payday loan is simply a small, short-term loan meant to cover the borrower’s expenses until their next payday. They have many names: paycheck advance, payday advance, and cash advances are the most popular when referring to payday loans, but the basic concept is the same. The borrower visits the payday lending store, secures the loan – $500 is the average loan – by providing proof of income, their Social Security Number (SSN), recent bank statements, and other personal information, and writes a post-dated check to the lender for the amount of the loan plus all loan fees.

That sounds pretty good, right? Go in, apply, leave with money the same day; what could be better? A lot. For starters, on the maturity date of the loan – usually within two weeks after the loan is approved – the borrower must either return to the store to repay the loan plus fees or face massive penalties for failure to repay on time. If the provided bank account doesn’t have sufficient funds, the borrower would incur a bounced check fee from their financial institution in addition to an increase in the loans interest rate. For families who were strapped before this vicious loan cycle, it would seem that there is no way out.

The Payday Loan Trap: How Borrowers get Caught Up

For a typical $500 loan, if the lender charges $15 per $100 borrowed, when the time comes to repay that $500 loan the borrower would be shelling out an additional $75 in fees, making the total loan repayment amount $575. For cash-strapped borrowers, an extra $75 in fees can put immense strain on an already stressed household budget. If the borrower can’t meet the repayment obligation, many feel that they have no choice but to extend the terms of the loan, incurring even more fees and penalties. Until the borrower can save enough to stop the payday cycle, it will continue, to the financial detriment of the borrower.

Payday lending is illegal in 15 states, and is regulated elsewhere. In some states, borrowers are only allowed to take out a specific number of loans per year. In other states borrowers can only take out a specified number of loans at a time, and after a certain length of time the lender must lower the interest rate and extend the term so that the borrower has a better chance of paying the loan balance down to zero.

Ways to Avoid Payday Lending

For low- and middle-class borrowers who either don’t have much in the way of assets or who have poor credit, when conventional banks and financial institutions just laugh when they see the borrower’s application, payday loans seem like the only way out. There are other ways to get out of a tight financial situation. Selling personal possessions on auction sites like eBay® or to a pawnbroker is one good way to make some extra cash. Check with your employer to see if they offer a paycheck advance. If you have a credit card with low or no balance, check to see if it offers a cash advance. You can also check to see if your community has any type of emergency assistance plans in place, and if worse comes to worse you can always ask family and friends to help you out. If no one else is willing to help, don't be afraid to seek help from your church, mosque or synagogue. No matter what you decide, and as with any loan, always be sure to check the terms and conditions before signing on the dotted line.

When Payday Lending Pays Off

For many, responsible lending is an oxymoron, but it can be accomplished. When a financial crisis strikes, be sure to keep a level head. If a payday loan seems like your only option, approach the situation responsibly. Be sure to only take out a loan in the amount you know you can afford to pay back within the specified loan term. This way you won’t incur any loan roll-over fees. Don’t take out more than one loan at a time, and don’t use a payday loan for everyday expenses, to pay down credit card debt, to pay off another payday loan, or to try to solve a long-term financial challenge. Payday loans are meant to be used for emergencies, not to fund your shoe fetish or video game habit.

Payday Lending: The Bottom Line

Although payday loans walk a fine line between beneficial and harmful to your financial health, by being a responsible borrower you can avoid the payday loan roll-over cycle. Know the laws about payday lending in your state. Be sure you know the terms and repayment schedules of the loan, and only borrow what you know you can afford to pay back. Only use them as a last resort after exhausting all other possible options. But better yet – avoid payday loans altogether, try to live within your means as best you can, and save, save, save!

Payday-loan centers have been around in the United States since the early 1990s and nearly since their inception they have been the target of name calling and insults. “Loan shark” seems to be just about the kindest commentary you will hear about these centers, while they have also been called “predatory”, “vultures” and “exploitative.” It goes without saying that the payday-loan industry takes great offense to this type of discourse and in recent months have made big efforts to set the records straight. In most cases, however, the labels have caused serious long lasting damage to the industry.

Payday-loan centers are not an American exclusive. Similar businesses can also be found in Australia, Canada and the United Kingdom. The basic premise is this: A customer in need of some quick cash goes to a payday-loan center (typically a storefront operation) and initiates the process, which usually involves a brief application, a credit check, and a background check. Also at this time the customer will be asked to show some proof of income, such as a recent pay stub, as well as legitimate forms of identification. Once approved for the loan, the client will issue to the payday-loan center a post-dated personal check for the loan amount they have been approved for plus a service fee. The typical life of these loans is fourteen days and the average amount borrowed is $500. If the borrower can not pay the amount due after the fourteen day term, the lender will ask them to roll over the loan for another fourteen days and, in turn, assess a new set of fees. According to industry reports, the bulk of payday lenders make their significant profits during this roll over term.

Last year Rep. Luis Gutierrez (D-IL) introduced house bill 1214 entitled, “Payday Loan Reform Act of 2009”. This bill is intended to amend the Truth In Lending Act and provides for stricter guidelines governing the payday loan business. This bill stipulates that fee amounts may not exceed 15% of the loan amount, prohibits the threat of criminal prosecution for failure to repay the loan, and allows the client the opportunity to rescind the agreement within two days providing that they provide to the lender proper notification of their intent. Further, all specific language of the bill that pertains to clients must be made readily available at the cash-advance-loan center in an easy to understand format that is written in both English and Spanish. Prior to these strict regulations cash-advance-loan centers charged up to 30% interest and lenders were also intentionally vague with their clients concerning the terms of the loan.

Besides these federal guidelines 35 states have also issued their own tight regulations for these centers. These states include Ohio, New Hampshire, California and Virginia. It is more than likely that additional states will follow suit and develop their own regulations in the coming years.

Needless to say, these tight regulations were long overdue for an industry that had run rampant for decades. Take a drive through any major city in the United States and you will see a series of signs for “Check Into Cash," “Fast Cash Loans” or “Pay Day Loan Center.” What you will not see is these signs in the same neighborhood as upscale boutiques or Mercedes Benz dealerships. Instead, these stores are conspicuously located in areas that house lower income and vulnerable folks who are almost always in a battle to make ends meet. Thus, cash-advance-loan centers have long been accused of engaging in predatory loan practices and taking full advantage of individuals whose paychecks are so low that they are in a constant struggle for survival. Also, more and more of these lenders are finding a booming business on the Internet where potential customers can receive payday advances in just moments from the comfort of their living room. As of 2008, there were more than 23,000 storefront payday-loan centers and countless other lenders that operate strictly via the Internet.

So is there a viable and legitimate place for payday loans within the American financial landscape? Or is payday lending simply loan sharking taken to the next level? Advocates and lobbyists for the payday-loan industry offer the argument that these centers provide a valuable service to low income clients who need a short term fix for a moderate financial crisis. Further, they are clear in their assertion that the loans are not intended to be an every payday occurrence, but rather just the occasional stop gap measure reserved for true emergencies.

However, even with the new interest limitations as outlined in the Payday Reform Act, which limits fees to fifteen cents on the dollar, this amount translates to an annual interest rate of 391% on what is essentially a short-term loan. According to recent reports, Americans pay more than $4.2 billion in payday loan fees each year. This is more than triple Starbucks’ total profit margin during 2009. Certainly the wise consumer would not utilize such a service unless their financial picture was dismal and their need supremely urgent. We're talking about being in imminent danger of losing their home, transportation or the ability to put food on the table. Enticing though it is, a burning need is not a trip to the spa, an upgraded stereo system or this summer's hot, strappy sandals. Even on the heels of the Payday Reform Act, a wise consumer will keep their eye on the big picture and their consumption in check.