FSS Newsletter :: March 2002

Money Matters :: Are Taking Payday Loans a Good Idea When I am Strapped for Cash?

With gaudy neon signs and hand-lettered posters promising money that seems too quick and easy to be true, payday loan outfits have sprung up like mushrooms on corners and in strip malls in neighborhoods all over the United states over the last few years. While payday lenders were relatively rare just a decade ago, today an estimated 8,000 to 10,000 ply their trade around the country, recording a profit of over $9 billion a year.

Payday loans go by a variety of names: cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans. Many businesses offer these loans at an exorbitant rate to consumers who need some money to get by until payday.

For example, On February 1 you need $200 cash, but your payday is in two weeks. The lender agrees to give you the loan with a $60 service fee. You then write a post-dated check for February 14 for $260. The lender will give you $200, and hold your post-dated check.
To repay the loan, you redeem your post-dated check with cash or money order, or the lender deposits the check. If you decide to extend or roll-over the loan, you’ll be charged an additional fee. This type of loan can be rolled over two, three or more times before coming due.

The real cost of the payday loan is the amount of money you must pay to obtain the loan. Based on annual percentage rates, you may be paying as much as 2,000 percent interest for using this type of loan. Payday loans may sound like a good source of quick and easy cash, but the truth is these types of loans may push you further into debt.

Before choosing a payday loan, look at all other options. Can you borrow from friends or relatives? Perhaps you can delay paying a non-interest bill such as a utility bill and make payment arrangements with the utility company instead of taking out a payday loan.

For those living paycheck to paycheck, with little or no ability to secure credit from banks for loans large or small, payday loans may appear the only alternative for quick cash, irrespective of the interest rate. The lenders are able to reap a bonanza on the borrower’s misery, so it is no surprise that payday loan operations seem to multiply by the day. Most of the time, these outfits offer other services, which can include high service fees, such as check cashing, notary public services, license plate distribution and money orders. Most also offer high interest loans on car titles, where defaulting borrowers lose their car.

“Payday loans are really a new phenomena,” says Rob Dixon of the Coalition for Consumer Rights, a national non-profit. “When the usury caps were lifted during periods of inflation in the 1980’s, the payday lending people saw a loophole and they crawled in. The growth since 1997 has been exponential.”

Industry spokespeople and business owners tend to give the impression that payday loan operations are “mom and pop” businesses, and many of them are. Many have a fly-by-night air. But increasingly, these operations are run by large corporations with branches in many cities and states. And large banks, which have traditionally avoided any association with payday lenders because of their seedy reputations, are finding payday loan operations’ profitability hard to resist. These banks, which don’t offer short term loans as part of their services, have been increasingly partnering with payday loan companies.

The bottom line is that I think our FSS clients should go out of their way to avoid payday loans. I have already spoken with clients who have been “sucked-in” with these companies and have hopped on board the rollover roller coaster and are simply compounding their financial problems.

Take a close look at your entire financial situation. If you don’t have money for emergencies, consider carefully the reason you haven’t saved. You may want to talk with a financial counselor or the FSS Coordinator about solving your money problems. Consider how you might start an emergency fund so that you won’t need to rely on payday loans in the future.