Payday Loan Lowdown
Payday Loan Lowdown
UPDATE; AUGUST,2014. Consumer Financial Protection Bureau caught off guard by relative lack of grievances filed agains payday lenders. The CFPB is planning to issue a comprehensive set of rules later this year to regulate the payday lending industry. It’s database shows that only 1 percent of the complaints in its database involve payday lenders. With only 3,400 complaints it has few facts to base its rule making on. The CFPB must rely instead on its research, supervision and enforcement experience. The lack of complaints is said to be caused by the fact that consumers understand what they are getting into when they elect to go down the payday loan road.
Is a payday loan ever worth getting? Here’s the payday loan lowdown. A payday loan is a short term unsecured loan taken out against your next pay check. It may be linked to your next pay check. Essentially it is a measure of desperation. These loans are infamous for creating a cycle of dependency as the borrower frequently pays more for an extension up to 3 times without paying down the principal. Payday loan lowdown companies operate under special exemptions from the usury laws in some states. The true APR or annual percentage rate of interest is astronomical. My interest in this topic was sparked by an attempt by the legislature of my home state of Rhode Island to ban them in 2012. This attempt was defeated and another attempt in 2013 was defeated again, with the help of a high powered lobbyist who was once the Speaker of the House of Representatives. The lobbyist received a fee of $50,000.00 for his successful efforts in blocking passage of this bill. His fee was paid by national payday lender Cashnet USA.
UPDATE; CFPB Studies 12 Million Payday Loans Released March, 2014
At the end of March 2014 the CFPB released a study it made of 12 Million payday loans. The results are devastating:
- Only 15 per cent of those receiving payday loans could repay them within 14 days.
- 20 per cent default at some point.
- 64 per cent renewed more than 10 times.
- 3 out of 5 borrowers had fees exceed the amount borrowed.
CFPB Director Richard Cordray says payday lender’s profits depend on “people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of the original loan.” Another new report states: “One could readily conclude that the business model of the payday industry depends on people becoming stuck in these loans for the long term.”
The FTC’s Credit Practices Rule prohibits payday lenders from requiring borrowers to consent to have wages taken directly out of their paychecks in the event of default. A recent case prevents those payday lenders who claim to originate their loans from Native American Indian reservations from holding borrowers to account in tribal courts.
UPDATE II: CFPB Hits Payday Giant ACE Cash Express with $10 Million Dollar Settlement
Payday lending giant ACE Cash Express out of Irving Texas use of illegal debt collection tactics has cost it $10 million dollars. $5 million dollars went to fines and $5 million dollars went to consumer refunds. The “unfair, deceptive and abusive practices” included:
- Threatening to sue or criminally prosecute debtors
- Threatening to charge extra fees and report delinquencies to credit reporting agencies
- Excessive collection calls including calls to employers, friends and relatives
Several interesting trade secrets emerged from this lawsuit as so often happens. It was against company policy for ACE Cash Express to either sue or report to credit reporting agencies. Sounds like an invitation for beleaguered debtors to tell them to stick their claim into a part of their anatomy where the sun never shines!
UPDATE III: CFPB About to Issue Comprehensive New Regulations
HINT: The CFPB is particularly upset at cascading bank overdraft penalties caused by repeated attempts to withdraw money from depleted checking accounts. More information as it becomes available. Director Richard Cordray’s comments about their findings include:
- One half of borrowers missed at least one payment
- Pay day lenders submitted payment requests to banks over and over
- Overdraft fees from banks averaged $185.00
- 1/3 of the borrowers in the study wound up losing their bank accounts
- At least one case showed 11 submissions to the bank in one day
Expect the new regulations to cap rollovers of loans and force lenders to verify borrowers ability to repay.
The Proverbial 2 Edged Sword
The arguments for pay day loans go something like this. If your electricity or cable bill is about to be shut off you will pay a reconnect fee as well as enduring the inconvenience and embarrassment, possibly spoiled food, damage to your electronics and so forth. If your bank allows you to overdraw you will pay a fee of at least $35.00 plus a daily fee until you make good. Everyone does not have a checking account where the bank will do this. If they do it won’t be for much money. It can be hard to find out just how far your bank will let you go. What if your car were about to be repossessed or you were about to be evicted or foreclosed upon? A storm is coming and the oil man won’t deliver without cash? What if the baby is hungry? One can imagine a circumstance where such a dire measure as a payday loan may be justified. In short it could be the lesser of 2 evils. The true APR of the money the bank “loans” you if you overdraw your checking account by even $1.00 is sometimes worse. Getting a car “unrepossessed” can be very expensive with towing and storage as well as other fees tacked on. Maybe you have a sure thing coming such as a bonus or income tax rebate. Freedom sometimes means the freedom to make bad choices.
They really are a Terrible Deal
Having said that, payday loans are truly a lousy deal. Most of them make a “hard” inquiry on the borrower with a credit bureau. Some advertise “no credit check” but don’t believe them on this point. Not only does the fact of the inquiry bring your credit score down some, but the fact that you were so desperate you had to resort to this will not be looked upon favorably by any future lender. The annualized interest rate? CashNet USA 664.30%, ChecknGo 661.77%, MyCashNow 485.45%. SureAdvance in Minnesota recently had to pay back a $760,000.00 settlement to consumers for charging interest up to 1564 percent! A typical payday loan of $700.00 with an APR of 603.84% and a 14 day term requires repayment of $862.29. You will pay $162.29 to use $700.00 for 14 days. Pew Charitable Trusts recently did an in depth survey called “Payday Lending in America: How Borrowers Choose and Repay Payday Loans.” This survey made the following findings:
- Borrowers actually favor more regulation by a 3-1 margin. Most say the loans take advantage of them but do provide relief.
- 58 percent of payday loan borrowers have trouble meeting monthly expenses at least half the time. These borrowers are dealing with persistent cash shortages rather than emergencies.
- Only 14 percent say they can afford to repay an average payday loan out of their budget.
- While payday loans are often presented as an alternative to overdrafting a checking account, a majority of borrowers end up paying a fee for both.
- 41 percent of borrowers ultimately need help anyway to eliminate payday loan debt. This help includes resorting to loans from friends or family, selling or pawning personal possessions, taking out another type of loan or using a tax refund.
The average payday loan is $350.00. Americans spend $7.4 Billion per year on the loans. This includes an average of $520.00 in interest per borrower. The borrower ends up indebted for 5 months of the year. Many of the companies hide behind layer upon layer of corporate entities. Their goal is lawsuit protection and tax reduction. They operate from such friendly havens as Cancun, Bahamas, Belize, Malta, West Indies and Costa Rica.
Military Need Not Apply
In 2007 the military responded to widespread abuse by restricting these loans for those who are serving. Banks such as Bank of America, Wells Fargo, JP Morgan and other giants enable their activities by permitting automatic repayments even in States where the payday loans are banned. The FDIC and Consumer Financial Protection Bureau are investigating this practice. Federal law permits customers to stop automatic withdrawals but many do not know this. I am no fan of a nanny state or any thing resembling government intrusion into people’s rights to make choices for themselves. The pay day lenders argue that their losses are so high they couldn’t be in business unless they are allowed huge interest rates that would make a Mafia loan shark blush. Nationally approximately 15% of these loans go into default. Studies show the defaults cost the payday loan companies about 25% of their annual revenue. An informed consumer is to be trusted to make the right choices for himself and his own unique circumstances. You got the payday loan lowdown here. Never use a payday loan for anything but the most acute financial distress. Find another way to cure your financial emergency because it is very hard to come back from the payday loan lowdown. Most important of all is to realize there are reasons why things are so bad. Analyze these reasons with a cold eye and resolve to do something about them.
And If I Get a Payday Loan and Don’t Pay it?
I have noticed a reluctance on the part of payday lenders to report the debt to credit reporting agencies. They will call and call continuously. I’m running a couple of experiments to see what they do to borrowers who default. I haven’t seen any activity in Small Claims Courts against defaults. I’m inclined to think that they are willing to just take the loss rather than show themselves and the details of what they do in a public way. I will continue to look for evidence of how they play the end game. This is not meant to encourage anyone to get one of these and then simply default. Some of the companies may be more aggressive than others about legal remedies and credit reporting. (See Update II for more on this.)