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Payday lenders can be found nearly everywhere.  They are located in store fronts and strip malls in almost every city in the nation, easily available to the middle class and lower income individuals that make up the majority of the payday lenders customers.  Payday loan lending has become one of the most notorious business practices examined today, with many people calling the lenders predatory and just as many calling them saviors.

Where Are They Located?

Payday lenders are typically located in the lower income areas of a city where poor and lower middle class individuals can easily access their services.  They are found along local bus routes and in areas where people come to obtain services on a regular basis, such as near grocery stores, restaurants, or clothing retailers.  They tend to cluster in areas that are not well served by local banking institutions or where opportunities to obtain short term personal loans are scarce.

Supporters Claim:

Supporters of payday lending claim that the lenders are providing a needed service to an underserved section of the nation.  The individuals that typically obtain payday loans do so because they are unable to obtain short term funding by any other method.  If they did not have the payday lenders available, they would not be able to secure money to pay for emergency situations and unexpected financial issues.  Many also claim that the fees charged by the payday lenders is less than the bounced check or over the limit fees that are charged by the nation’s largest banking institutions.

Opponents Claim:

Many opponents of payday loan lending claim that the loans that are made are predatory, prey on the working class, and trap individuals in a cycle of debt that is very difficult for them to free themselves from.  Loans that are obtained from a payday lender must be paid back to the company within a two week period – the average interval between paychecks for working individuals – along with the interest and fees charged for the transaction.  This generally works out to be 300% and 400% interest for a payday loan versus between 10% and 20% interest for placing the same amount of money on a credit card.

The Biggest Issue
 
The most contentious issue that arises in the payday loan debate is the fact that a large number of the individuals that patronize payday loan lenders end up taking out another loan immediately because they cannot afford to have the entire amount of the loan taken out of a single paycheck.  This leads to a vicious cycle where the amount of fees eventually paid for the loan far surpasses the original amount of the loan.  Because many of these individuals are already living paycheck to paycheck with little disposable income, these swiftly increasing fees can quickly result in financial devastation for the people who take out the loans.

Over the past few years, it has been debated whether it is better to have overdraft protection on a personal debit or credit card or if it is better to take out a payday loan to cover end of the month expenses if the unexpected happens and the person runs out of money before that next paycheck.  Of course, the best option would be not to have to deal with either of these two options, but if the choice must be made, it would be helpful to know how these two options compare to each other.

Loan Amount

Payday loan amounts are based on the amount that the person receives in their weekly or bi-weekly paycheck.  The loan amounts begin at $100 and are typically capped at $500 or $800, depending on the policy of a particular payday lender.  The amount that is covered under overdraft protection is typically much less and can be denied by the banking institution at any time, resulting in a declined transaction in the case of a debit or credit card or a bounced check.

Repayment Period

Payday loans are considered to be an advance on your next paycheck and must typically be paid back at the end of a two week period.  This can cause financial hardship for the person taking out the short term loan if they do not make enough money to cover the repayment of the loan and cover the rest of the bills that come due during that time period.  Overdraft protection charges are immediately charged to the person’s bank or credit card account, giving their account a negative balance, and the overdraft charges must be paid quickly to prevent negative balance or over-limit fees from being charged to the account as well.

Occurrence Limits

With a payday loan, the person will only be able to have a single payday loan on file from a single payday loan lender location during each two week period, unless the original loan is paid off to allow the request of another payday loan.  Some people skirt this system by having payday loan accounts at multiple lenders so that they can take out multiple payday loans at the same time.  Overdraft protection can be used as many times as the person sees fit within a monthly period, although some banking institutions and credit card companies will deny the transactions if they feel that the system is being abused or that there is a chance that they will not be repaid.

Fee Amounts

Payday loan fees increase progressively depending on the amount of the loan but typically work out to $15 for every $100 borrowed.  Overdraft protection fees are a set amount regardless of the amount of the transaction and are typically between $29 and $39 per occurrence.  This means that going $5 over the limit in a single transaction will result in a $39 charge just the same as going $300 over the limit with a single transaction.

Payday loan stores are present in many different locations across the nation advertising financial relief for people that may not have any other options for obtaining the loan that they need.  Payday loan stores are one of the most controversial businesses of the last two decades, with supporters claiming that they provide an essential service that is needed by the lower income community and opponents claiming that the businesses prey on people that can least afford it.

Where Are Payday Loan Stores Located?

Payday loan stores can generally be found where the population is less affluent because here is where most of the people that seek their services can be found.  At first, many payday loan stores opened near military bases because the majority of the people in the area were living on low military wages.  A great deal of service members fell into an endless cycle of debt due to constantly receiving payday loans and a new law was passed prohibiting payday loan stores from giving a payday loan to members of the military.  This law does not stop the payday loan stores from giving a payday loan to any other member of the nation as long as they have a valid ID and can produce a paycheck stub. 

What Issues Are Associated With Payday Loan Stores?

The biggest issue associated with a payday loan is the interest rate that is charged for these short-term loans.  The interest rate associated with a bank loan or credit card is between 5% and 10% annually.  For people with low credit scores or a shaky credit history, the interest rate for a credit card may be as high as 28%.  The interest rate charged for a two week loan from a payday loan store averages between 400% and 800%.

It is estimated that an average person using a payday loan store averages more than 7 payday loans each year, with the majority of the payday loans occurring one after another.  This indicates to researchers that many of the people that rely on payday loans are unable to repay the original amount within the time period determined by the company and have to take out a subsequent payday loan, either from the same location or from a different company, to cover the charges for the last payday loan.  In this way, many payday loan recipients find themselves paying a great deal of money in fees to the company with very few options for getting out of the cycle.

Many experts agree that payday loans are not a good idea for a significant percentage of the population and that the interest rate is astronomically high for the services provided.  There are several states that are trying to pass legislation that caps interest rate for payday loans at a much lower interest rate, often as much as ten times less than what the payday loan stores are currently charging.  Payday loan companies are saying that an interest rate cap will put them out of business but legislators argue that no other company is charging such a high rate and they still manage to stay in business and make a profit with their products.  As the debate continues, it will be interesting to see which view is adopted as being the correct one.

Over the last year, many state governments have decided that they have had enough of the predatory practices of the payday lenders taking advantage of the people in their states.  Laws have been passed in some states capping the interest rate that the companies are allowed to charge or banning the practice as a flawed business model altogether.  Although lobbyists and supporters of the industry are predicting that dire problems will face lower income individuals in the states where laws regulating the payday loan industry have taken effect, many law makers believe that they are doing what is best for their constituents by protecting them from the predatory practices of the industry.

The Problem With Payday Lenders

At the heart of the issue is the business model that payday lenders use to make money in the industry.  The loans that they extend to consumers must be paid back within a two week period, which is often not long enough for the person to earn the additional money needed to pay back the entire loan, resulting in a cycle of borrowing new loans to pay off the old loans.  Experts estimate that the majority of the individuals that take out a payday loan get trapped within this cycle of debt, taking out an average of 12 loans throughout the year and paying the payday lender hundreds of dollars in interest for the loan.

Another issue at the heart of the problem is the interest rate that the payday lenders are charging to consumers for taking out the loan.  The payday lenders argue that their loans come with terms of $15 for each $100 taken out as a loan, which is not an excessive amount by their calculations.  When calculated as an APR, which is currently the only legal way to represent an interest rate applied to a loan, the lenders are charging their consumers 391% interest on the loan, an amount that lawmakers say is exorbitant and wildly unfair to consumers.

The States’ Solutions

Many states are attempting to find a solution to the issues that are occurring within their jurisdictions in regard to the payday lending industry.  The first regulations of the industry were actually issued by the federal government, when Congress capped the interest rate that payday lenders were allowed to charge military service personnel at 36% after seeing how many of America’s service members were falling into the trap set by payday lenders in stores often located just outside of military bases.  In response to the new law, the payday lending industry stopping making their short term loans to service members altogether and closed many of their stores near military bases.

State governments took notice and began to pass their own laws limiting the reach of payday lenders in their state. 
-   Washington, DC and North Carolina banned payday lending within state borders altogether.
-   Georgia made payday lending a violation of anti-racketeering laws, meaning payday lenders could be prosecuted for doing business in the state.
-   Oregon, Ohio, and New Hampshire capped payday loan interest rates at 36%, with only Oregon allowing the industry to charge an additional $10 fee per loan.
-   Arkansas capped the interest rate that payday lenders were allowed to charge each loan at 17% and the state attorney general announced that the law would be strictly enforced.

More than a dozen states have passed laws limiting the practices of payday lenders within their borders.  It will be interesting to see how many other states will follow suit.

As the abuses of the payday loan industry and the number of people trapped by these practices continue to be exposed in the national media, several public officials have called for an end to their predatory practices. Many payday lenders are even putting their businesses for sale. Investigations have found that many of these practices were unfair to consumers and the terms of the loans were created to keep the borrowers trapped in a vicious cycle of debt.  Because of this information, many lawmakers have called for restrictions on the payday loan industry so they will no longer be able to take advantage of low income citizens.

What Is The Problem?

At issue are the practices commonly used by the payday loan industry to obtain high fees from the economic hardship loans they make to individuals that need a short term loan.  These payday lenders will often charge their borrowers close to 400% interest for the short term loan and require the loan to be repaid within two weeks, which is often not long enough for the individual to make enough additional money to pay off the loan.  The result is that a large number of the individuals that take out a single payday loan often have to take out multiple additional payday loans to get back on their feet, while the payday loan industry collects its massive fees on each transaction.

The payday loan industry claims that the interest rates and fees that they charge for the loans are necessary to provide a profit for the company.  They claim that they are often the only place for these individuals to obtain the money they need in times of economic hardship and that changing the terms of their loans would result in the payday loan companies closing and putting thousands of individuals out of work.  They also claim that any action taken against the payday loan industry will end up hurting the average consumer by removing a solution to their economic needs.

What Lawmakers Propose

Lawmakers across the country are understandably skeptical about the claims put forward by the payday loan industry.  For years, they have been listening to the payday loan industry make the same claims while watching more and more of their constituents fall into to the trap set by the lenders.  It has been estimated that the average consumer that takes out a payday loan will end up taking out 9 or more loans throughout the course of the year and end up paying the lender hundreds of dollars in fees in order to break free of the loan.

Some lawmakers believe that the practices used by the payday loan industry are unfair and are looking for ways to curb them.  One notable example is the bill making its way through the legislature of Ohio, which would place unprecedented new restrictions on the payday loan operators that do business in the state.  Any business that objected or refused to abide by the restrictions would not be allowed to do business in Ohio. 

The bill would cap the interest rate that payday lenders are allowed to charge borrowers at 36%, more than 100 times lower than what many in the industry currently charge, and limit the number of loans that an individual could take out in any calendar year to four.  Any individual that wants to take out three payday loans in a 90 day period would have to attend a financial management class to help them manage their finances and avoid having to take out a payday loan.  Lawmakers believe that these are some of the steps that need to be taken to eliminate the cycle of debt perpetrated by the payday lenders.

You can find them almost anywhere.  They are present in urban strip malls and stand alone storefronts across the nation and lure many unsuspecting individuals into their clutches.  I am talking about payday loan lenders, one of the most controversial businesses of the last twenty years.

Payday loan lenders can generally be found where the population is less affluent, a place where they say their services are needed but critics claim that they prey upon the working class.  At first, many payday loan lenders opened their shops near to military bases where the majority of the individuals were living on a soldier’s wages.  So many military members fell into the trap of payday lending that there was a new law created prohibiting payday loan lenders from lending to members of the military.

This does not stop the payday lenders from lending to the rest of the nation though.  Most at issue is the interest rate that these lenders charge for their brief loans to the public.  The interest rate for a typical bank loan or credit card is between 5% and 10% annually while the interest rate charged for a loan from a payday loan lender averages between 400% and 800%.

The Trap Of Payday Loan Lending

Many of the individuals that use a payday loan lender get trapped into an endless cycle of debt, where the only way that they can pay off the current loan is to reapply for another loan as soon as the money has left their account for the first loan.  Many of these individuals are already living paycheck to paycheck and use the payday loan lenders because they believe that there are no other lending options available to them.  Unfortunately, many of them are unable to afford to pay off the entire loan when the two or three week loan period is up, so they take out another loan as the payday lender rakes in their 400-800% interest rate payment for each loan.

It is estimated that the average individual using a payday loan lender takes out more than 7 payday loans each year, with a high percentage of the loans occurring back to back.  This indicates that a high number of individuals are unable to repay the original amount and take out a subsequent payday loan to cover the charges for the last loan.  In this way, many payday loan recipients find themselves paying a great deal of money in fees to the lender with no way out of the cycle.

Most financial experts agree that payday loans are a bad idea and that the interest rate is exorbitant for the services that the lender provides.  A number of states are attempting to enact legislation that will cap the amount of interest that a payday lender is allowed to charge at a 36% interest rate, more than ten times less than many of the payday loan lenders are charging now and a rate that they say will cause them to go bankrupt and put them out of business.  Only time will tell what the outcome of that situation will be.

The current status of banking in the United States is much unlike any culture in the history of the world. There is much more capital to invest, and because of fractional reserve banking, there’s just so much money to loan out. Before only people who could surely pay off a loan would be able to get one, but this is no longer the case. The sheer amount of money available to be loaned has increased so dramatically that bankers and finance companies have found ways to make it mathematically viable to loan money to people who won’t always pay the money back.

One of the most common types of these sub-prime loans is called a payday loan. There are even companies that offer payday loans through the internet. They’re extremely easy to get. Essentially, you will give the finance company a post-dated check for the amount of your paycheck, and the amount of money that they will give you in cash is a bit less than the amount of the check you give them. A week or two later, your paycheck comes and they cash the check.

The idea seems simple enough, but many people have accused payday lenders of preying on the lower class. When you look at the mathematics of payday lending, you can see why. Quite often the interest rates that they charge are anywhere from 400% to 800% on an annual basis. This is much more than any normal person would think is reasonable to pay. There was even a recent piece of legislation which prevents these companies from being near military bases, because so many servicemen fell into the payday loan trap. Their debt to income ratio would become so high that they were deemed a security risk because they would be more likely to accept a bribe!

We know that payday loans are not the best financial product out there, but are they ever a good idea? What if you need money to put gas in your car or to pay for groceries? After all, you have to eat and drive to work! Is it okay to get a pay day loan then? Many people would think of this as a justifiable situation, and this is how most payday loans begin.

When we look a little bit closer, we find out that payday loans are really never the solution, and here’s why. Let’s say that it’s the 5th of the month, and you had an automobile accident or some other such emergency and are now out of money until the 15th. You need to eat, so you go get a payday loan for the $1000 paycheck you would be getting on the 15th. You get $900 from the payday loan place on the 5th, but now that money has to last until the end of the month. So instead of having $1000 from the 15th to the 30th, you now have $900 from the 5th through the 30th. Chances are there’ll be a lot of month left when the money’s all gone. Of course you have to eat, so what do you do? You go get another payday loan for the 1st, and it becomes a vicious cycle.

There’s the fundamental problem with payday loans. You don’t need your paycheck sooner, you just need more money. A payday loan will never do this for you, in fact you will have less money with all of the fees that you are paying. There is no situation where a payday loan will solve your money problems, ever!

So what’s the alternative? It’s the 20th of the month, there’s mo money for food, and your car is running out of gas. You have hungry mouths to feed and you have to get to work, what do you do? There are always options. A pay day loan might seem like the easy way out, but this is not the case. Instead consider searching for some temporary extra income. You can do this by having a garage sale, selling some stuff, doing day-labor type work, temp work, and the like. If it comes down to it, ask your church for some help, or your family. Don’t borrow money; because the last thing you need right now is another loan. There are people out there who will help you. If you really need food, go to the food pantry.

There are options out there, but don’t let a payday loan even come onto the radar of consideration. They won’t solve your short-term financial problems, and will only put you deeper into debt and give you another payment to worry about.