The Predatory, Parasitic Problem of Payday Loans

I live in the Sherwood Forest area of Baton Rouge, LA and I've noticed over the past few years how many payday loan, cash advance loan and similar establishments have just popped up. There are now eight such businesses on Florida Boulevard between Little John and Oak Villa, a section of road only 2-3 miles long. I've also seen many other similar businesses growing rapidly throughout other parts of our city and neighboring parishes. I did a Yahoo search using the term "payday loan" and got 16.6 million hits. Most of them are companies making the loans, so now you can even get them over the internet. A lot of people must be using these loans, otherwise these businesses wouldn't be flourishing.

I don't believe there is ever a reason that you have no choice except to use a payday loan. As a financial planner and fiduciary, I find the high growth of these businesses extremely worrisome. These businesses are predators of the desperate. Credit card debt is enough of a problem in our society, but payday loans are like parasites, sucking more money out of people than they could ever hope to repay, especially if they're rolling their debt over week to week. At the end of the rope is bankruptcy, and bankruptcy law just got a whole lot tougher on the debtor.

What are payday loans? They have many names: payday loans, cash advance loans, check advance loans, loan sharking, post-dated check loans and deferred deposit check loans. Getting a loan is simple. The borrower writes a personal check to the payday loan company for the amount he/she wishes to borrow plus the fee. The loan company gives the borrower that amount of money minus the fee. The fee can be a percentage of the amount of the check or a flat fee per $50 or $100 borrowed. If the borrower extends or rolls over the loan for another week, or two, or three, the fee is added to the loan each week the money hasn't been repaid.

For example, say you borrow $200 for up to 14 days at a company whose biweekly fee is $15/$100 borrowed. (They can't charge interest by law, so now they call their charges fees). The company then agrees to hold the check you wrote for $230 for 14 days. When the time period expires, the loan company can deposit your check or they will return your check to you if you bring them cash to pay off the loan. In two weeks, you now owe the loan company $230 to pay off the loan. If you pay the loan off in a week, you still owe the company $230. If you can't pay off the loan, or choose not to, you can roll it over for another two weeks for another $30 fee. If you roll the loan over just three times (8 weeks total) your fee will be $120 to borrow $200. The annual percentage rate (APR) of this loan would be 390%. And we thought 21% APR on a credit card was bad!

These loans are very expensive short-term, high interest-rate, sorry -fee-rate, loans marketed to those who have no credit or bad credit. Many young people today also use these companies because they are easy and convenient, and service is fast. Fee rates can be as high as 500% APR, and there can be additional fees and charges on top of that. This information tends to be in the fine print on the agreement. Payday lenders are required by the Truth in Lending Act to disclose all loan terms, including fee rates per amount borrowed, other fees, and other charges, but few people actually take the time to read the fine print. Desperate people are led to believe these loans are a solution to their financial problems, but realize too late that they are actually an even worse financial trap.

Why do so many people need to borrow money before they receive their paychecks? Is pay so low that people can't keep up? Has pay grown much more slowly than cost of living? Is the minimum wage too low? Are people less able to manage on the money they bring home? Do they waste too much money on unnecessary items then don't have enough left to pay their bills? Do they just make it paycheck to paycheck until a financial emergency happens? Do more people need more personal finance education?

All of these have something to do with it. If people who are likely to use such a service truly understood the fine print, they would probably be less likely to patronize such businesses. It would also be effective if these finance companies were illegal in this state. But people still need a solution for their financial problems. Minimum wage hasn't kept pace with the cost of living and the economy has been really tough on most everyone over the last several years. Then Hurricanes Katrina and Rita really tightened our financial thumb-screws. Minimum wage increases and banning payday loan companies are legistlative issues, and if we feel the minimum wage needs to be raised and payday loan companies need to be banned, we should vote for candidates who will fight to do this. For now, people need more information on alternatives to payday loans, social service programs and how to apply for them to supplement their incomes or help pay their bills when they can't. The surest way to shut these businesses down is for everyone to stop using them. Businesses that don't make money close.

Try These Alternatives Instead of a Payday Loan

If your car is broken down and you need money to get it fixed that you won't have for a week or more, and you still have to get to work, call some people you work with and arrange a ride until you can get your car fixed. Or ask your mechanic if he'll let you pay him next week. The answer will usually be no unless the mechanic is a friend, but it never hurts to ask. You might also be able to barter with your mechanic to get a little time to pay him. Offer to cut his grass for a month, wash all the cars he has waiting for customers to pick up, or something to earn his respect. Then pay him back as soon as you get your paycheck before you pay anyone else. You might be able to take the bus, so find out the bus schedule and dig around in the couch cushions for spare change.

Get a second part-time job to supplement your income so you can meet all your expenses, save money and pay off your debts. There is no shame in hard work. Even a small business like part-time lawn mowing or gardening on weekends, or bringing car detailing services to customers at their homes will earn you enough so you can stop borrowing. Can you change oil? Can you do it someone else's driveway? Print some fliers and deliver them around some nice neighborhoods. You'll probably have more business than you can service and you'll be able to charge accordingly. If you need ideas about ways to earn extra money, go to the library and search that topic in the online card catalog. There are dozens of books with ideas on earning extra money that won't interfere with your full-time job. There are also several ways to earn extra money online, but be very careful about fraud and scams, and stay away from multi-level marketing schemes (MLM). You shouldn't have to spend money beyond buying a couple of tools or supplies to make extra money.

Build an emergency savings fund with a minimum of $1000 to start, then build up to 3 - 6 months of your monthly expenses slowly while you tackle your debt. Even small deposits can help to avoid borrowing for emergencies or unexpected expenses. By depositing the amount of the fee you would pay on a typical $300 payday loan ($45 if paid in two weeks, no rollovers) in a savings account for six months, you would have $585 cash available for emergencies.

Call 211 on your local Baton Rouge telephone for assistance with social service programs. This is the United Way help line.

Consider a small loan from your credit union or small loan company, an advance on pay from your employer, or a loan from family or friends.

Ask your creditors for more time to pay your bills. Find out what they will charge for that service, such as a late charge, an additional finance charge or a higher interest rate.

Make a realistic budget, and figure your monthly and daily expenditures. Avoid unnecessary purchases, especially small daily items. Their costs add up quickly.

Find out if you have, or can get, overdraft protection on your checking account. If you are regularly using most or all of the money in your account and if you make a mistake in your checkbook register, overdraft protection can help you avoid NSF charges.

When you need credit, shop carefully and compare offers. Look for the credit offer with the lowest APR. Compare the APR and the finance charge (and any loan fees, interest and other types of costs) of credit offers to get the lowest cost.

If you need help working out a debt repayment plan with creditors or developing a budget, check this book out from the library: "The Total Money Makeover" by Dave Ramsey and read it. It will give you solid advice on how to get out of debt and stay out. You can also contact your local Consumer Credit Counseling Service, or enroll with their online service. CCCS is free to consult and charges a one-time $25-$30 fee to enroll. Many other agencies, even though they are non-profit, charge a much higher fee and may not pay your creditors on time even though you paid debt-reduction company on time. These companies often hold payments to make creditors reduce there interest rates to the debt-reduction agency. These savings are not passed on to you. This hurts your credit even more and may run up additional fees and other charges. Some also charge a monthly fee to handle your debts. Paying a periodic fee to do that is taking you in the wrong direction. All your extra money needs to go toward eliminating your debt.

Finally, if you decide to use a payday loan, borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to your next payday.

But, as I said at the beginning of this article, I don't believe there is ever a reason that a payday loan is your only option. You'll have to get creative and humble, but you can either make the money you need quickly, barter with businesses, family and friends so you'll work off the money you owe, or ask family, friends and colleagues for a favor or some temporary help, like a ride when your car breaks down. When someone helps you, make sure you repay the help in kind and do it joyfully. If those who help you never ask you for anything, help someone else who needs it - pay it forward. When we help each other the world becomes a better place, and payday loans will become a thing of the past.

Note:

If you believe any lender you used has violated the Truth in Lending Act, file a complaint with the Federal Trade Commission (FTC). The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or to get free consumer information, visit http://www.ftc.gov; or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.