Pay Day Loans
Payday loans, to say the least, are very controversial, particularly with consumer groups. In many states, they are not available because the state legislatures forbid lending money at such a high interest rate (sometimes as much as 500%). Payday loans earn payday lending companies about $6.5 billion in annual revenue as of 2012.
When you apply for a payday loan, usually the lender will require that you give him a personal check (or draft) that is payable to the lender for the amount being borrowed, plus an additional fee. The lender agrees to hold the check until a specified date. When the due date arrives, the borrower may be able to extend the loan, renew the loan or roll-over the loan. Of course, there are additional fees associated with these options.
Because the lender will probably not check your credit, you must provide certain information when applying for a payday loan. This will include proof of a checking account, proof of employment in the form of a pay stub; your last bank statement; your social security and drivers license numbers; proof of residency and other information.
Payday Loans: The Good, the Bad and the Ugly
What is good about payday loans is that, despite the very high interest rates, they do provide quick loans for people who are employed, but for one reason or another, don't have any cash available. If you need some fast cash in a hurry and can repay the $500 plus $75.00 in a few weeks, then this is a good, albeit expensive, one-time solution.
What is bad about payday loans is, as mentioned before, the exorbitant interest rates and fees to obtain these short-term loans. Critics argue that these companies are taking advantage of the working poor and violating state usury laws. But so far, payday lenders have gotten around usury laws by persuading state legislatures to call the costs associated with these loans something other than interest. Thus, they can side-step usury laws just by contributing heavily to state representatives' campaign funds. Other states have banned payday lenders completely or capped the interest rates that they charge.
In 2010, the federal government began regulating payday loans, capping the interest rate. The military has asked Congress to pass a law requiring payday lenders to charge military personnel no more than 36% interest on any payday loans since it is estimated that one out of every five members of the military routinely take out payday loans.
What is ugly about payday loans is that numerous consumers find themselves caught in a trap from which they can't escape. To illustrate this, suppose you obtained a payday loan for $500, plus agreed to pay a fee for this loan in the amount of $75.00. Because you were having cash problems to begin with (you did need a loan, after all), you are at high risk for not having enough money to cover the check you gave the borrower when you obtained the loan. But not to worry, the lender has a nice option waiting for you if this happens, and he hopes you will take it -- you can extend the loan if you agree to pay another $75.00 fee. The lender is hoping that you will keep extending the loan, giving him another $75.00 over and over again. Over time, this can add up to quite a sum. Some people have actually paid as much as $3,000 in fees because they could never scrape up $500 in cash to repay the original loan. As of 2011, the average consumer of payday loans took out ten loans per year and paid 400 to 800 percent interest on their loans. The average $350 loan ended up costing the consumer at least $800.
Your Neighborhood Bank Gets In On the Action
Despite all of the negative press about payday loans, this industry is growing by leaps and bounds. Entrepreneurs all over the country in every state (where it is permitted) are opening up shops offering these types of loans, plus you can find them on the Internet. Whether consumer groups like them or not, they are here to stay and consumers seem to want them.
In fact, they are so lucrative that your neighborhood bank decided it wanted some of the action. Does your bank over something called "overdraft privilege" or "overdraft protection"? Overdraft protection means that, Instead of returning a check for insufficient funds, more and more banks are permitting their customers to purposely overdraw their checking accounts. The bank agrees to not return the check marked insufficient funds in exchange for the account holder agreeing to pay the insufficient check charge fee or some set fee which can range anywhere from $15.00 to $25.00 a pop. Although bankers will never admit it, what they are doing is, in fact, offering their account holders a short-term, instant type of payday loan at an exorbitant interest rate that is just as bad as the payday loans offered by private financing companies.
This situation got so bad that Congress had to step in and regulate the practice. Now, banks are required by federal law to allow their customers and accountholders to opt in to overdraft protection rather than automatically enrolling them in it. In addition, banks can no longer charge for multiple "hot checks" and the amounts they can charge for overdraft protection are now regulated by federal law.
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