Payday Loans: Legalized Loan Sharking

 

The payday loan industry likes to say that it provides a service to underserved low income communities where credit may be otherwise hard to come by. They also claim to provide emergency funds for people with a one time cash shortage. 

The truth is that payday lenders are nothing more than legalized loan sharks, and while the consequences of not “paying up” when the loan comes due are not as dire as broken legs and fingers, they are just as crippling.

Because of the short-term nature of payday lending and the high interest rates charged, upwards of 300%, payday loans can trap people into a vicious cycle of  what is known as “loan churning,” that is having to either renew a single loan multiple times, for multiple fees, or  having to obtain additional payday loans to pay off the first.

This “loan churning” is how most payday lenders make their money. Their entire business model is predicated on the fact that the people to whom they are lending money will be unable to pay off the first loan and will need additional loans for which they can collect additional fees.  When the borrower runs out of extensions or cannot take out any more loans, there’s money to be made there too, in insufficient funds charges and late fees. Some payday lenders will actually deposit the same check multiple times a day once it gets returned the first time in order rack up the fees. If the borrower gave the payday lender permission to electronically debit his bank account, (common for online payday loans) the payday lender will first debit the fee for the loan and then the check. When the check doesn’t process, they will debit the NSF fee, and they will do this multiple times, draining the borrower’s bank account.

Once a person has used up all of his renewals or he can’t obtain another payday loan, huge amounts become due and when he can’t pay, the collection tactics used by these firms can get quite nasty.  Since payday loans are secured with a personal check for the amount of the loan plus the fee, one tactic payday lenders like to use is to threaten the borrower with criminal prosecution for bad check writing. In most states, this tactic is illegal, but that doesn’t prevent the payday companies from using it.

Some statistics about payday lending:

  • Only 9% of the payday loans are for one time emergencies. The rest are for making ends meet for one paycheck to the next.
  • Over 40% of borrowers thought that their payday loan interest rates were less than 30% APR when they were actually over 400% APR.
  • There are more payday lender storefronts across America than there are Starbucks and McDonalds.

Payday loans are nothing but a debt trap. There are other options if you find yourself in a financial pickle. Borrow money from a friend or relative or obtain an advance on your pay from your employer. If the reason you need quick cash is an upcoming utility bill that you can’t cover, call your utility provider. Almost all will offer extensions and payment plans.

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