Payday Loans
Quick cash
Companies that offer payday loans have been around for a long, long time under one guise or another. Basically, these are predatory loansharking schemes that operate just barely within legal boundaries. In some cases they keep “clients” in nothing short of fiscal servitude.
Payday lending as an industry is growing, primarily because it is so lucrative. This year alone, it is predicted to rake in some seven billion dollars in fees. This is based on loans totaling forty seven billion dollars, according to a market research company. That's up from $20 billion in 2002. Do the math – you will see why the business is so tempting to the unscrupulous.
How Payday Loans Work
Payday loans target those who can least afford to take advantage of the service. These are generally low wage earners who have pressing bills to pay. They take out a loan against their next paycheck. The relief is temporary because when payday rolls around and they pay off the loan they find themselves in the same boat as they were before. What's worse, if their loan can not be repaid within a two week period, the fees plus the interest get added back into the amount owed. The APR (Annual Percentage Rate) may exceed a staggering 1,100 percent.
Is anyone protected from such a high APR? U. S. service personnel are to some extent. Back in October 2006, the United States Congress was so alarmed at these predatory practices being targeted at service members that they passed a bill that capped the APR for them at 36 percent. They recognized that some of the information required from the lenders was beginning to compromise security concerns.
The lender will sometimes require a personal check from the borrower to secure the loan. The interest and fees are deducted from the check amount and the balance is given to the borrower in cash. In this way, the lender just has to cash the check at a predetermined date.
In the South Texas city of Houston, these payday lenders charge roughly 9.9 % interest on the loan and fees of $20 per every $100 borrowed. This may be within legal requirements but it is certainly morally questionable. Even so, some traditional banks are starting to get in on the action as they see the opportunity. At least they are entering the game at a less bloodthirsty level.
For instance, Wells Fargo now allows account holders who use direct deposit to borrow up to one half of their typical monthly deposits, or a maximum of five hundred dollars. Their finance charge for this service is two dollars per every twenty dollars borrowed.
What goes around comes around. Bank deregulation happened in the 1980s. As a consequence, traditional banks stopped making these quick turn-around loans and payday lenders quickly saw the business opportunity and moved in.
Alternatives to Payday Loansharking
The Federal Trade Commission gives some good advise about alternatives to having to take one of these payday loans. First, talk to your bank about overdraft protection on your checking account. If the account holder is on good terms with the bank, chances is the bank will be quite willing to play ball.
Talk to your landlord and others you owe money to. Explain your situation and ask that they not give you a bad credit rating. The late fee you will pay will almost always be less that the interest and fees from the payday loan.
Make a budget and stick to it. Put back some savings by cutting back on unneeded expenses such as a movie or that new CD. Chances are that you will soon have enough to carry you through those short times when you really need it. And you will be saving all that interest and those fees.