Payday Loan Myths
Payday loans have taken a bad reputation over the years with all the propaganda from naysayers of the payday lending industry. This article presents facts and an honest explanation of the actual figures in the interest of dissolving some of the rumors and figures taken out of context by addressing them one at a time.
Myth: Payday loans are very high priced with high interest rates
Critics of payday loans warn about “390% annual interest rates.” This is a distortion of the truth because a payday loan does not last a year. A payday loan would have to be rolled over 26 times to accumulate such an interest rate, and many states do not even allow for one rollover. The states that do allow for rollovers have a maximum of four rollovers; less if the state requires it.
The bottom line is a payday loan is much more economical than alternative solutions. Consider the following examples: a payday loan is typically charged a 15 percent interest rate, which is 391 percent over the course of a year, but a $100 utility bill with a $46 late/reconnect fees will accumulate 1,203 percent in a years time, and $100 bounced check with $54 NSF/merchant fees will accumulate 1,409 percent interest in a year.
Myth: Payday loans corner borrowers in an unceasing “cycle of debt”
As was mentioned above, the maximum period of time a payday loan can be outstanding — in states that permit rollovers — is eight weeks (four rollovers for a two-week loan). And it is regularly reported that the majority of customers get payday advances between once a year and once a month. Even still, a payday loan is again more economical than the alternatives considered by consumers.
Myth: Payday lenders impose upon less fortunate people and minorities
Critics have spread this belief, and have in turn given the customer base of payday loans a skewed image. The fact is that everyone approved for a payday advance must at least have a steady income and an active bank account. And most people receiving such loans make between $25,000 and $50,000 a year. Over half have college experience under their belt, with only six percent not having a high school diploma.
Myth: Payday lenders’ high fees help the industry make billions in profits
Most banks do not offer short-term, low-denomination loans because they are actually so expensive to maintain. On average, it costs a small bank $174 to originate and maintain a loan for one month.
Myth: Payday lenders loan money to people who cannot afford to pay it back
It doesn’t seem that a business would make much money from people that cannot pay them back money they’ve been loaned. Customers are again required to have steady income and a current checking account, and all reputable payday lenders carry writing criteria. State regulatory reports confirm that over 90 percent of the loans are repaid on time.
Myth: Payday lenders hide fees and mislead their consumers
The Truth in Lending Act (TILA) requires that the terms of the loan are to be clearly outlined in the lending agreement signed to get the loan, and the cost of the loan is usually shown on signs in the stores. The hidden charges, balloon payments, and accruing interest do not exist. Payday loans only involve single, flat fees. The Annie E. Casey Foundation did a study recently, and concluded that “Customers do make a cost analysis in comparing the price of a payday loan with the alternatives…”, which has proven true. 96 percent of payday advance customers said they knew what the finance charges were on their loan in a recent survey.