What Politicians Don't Tell You about Payday Loans
The payday loan industry in recent months has made headlines all over the country as more and more state lawmakers, eager to show their involvement in trying to solve the nation's financial crisis, continue to jump on the bandwagon in an attempt to limit--or completely abolish--the practice of providing fast cash to people who need it. Unfortunately, these mostly biased accounts rarely paint the full picture as they focus on the opinions of wealthy politicians rather than the financial experts and consumers who see businesses like Find Payday Loans as long-overdue additions to the lending industry.
A Financial Blessing for Consumers
Among these finance experts is Tim Miller of the Center for Consumer Freedom. In an editorial published in Iowa's Des Moines Register, Miller condemned the government's mob-like mentality in its sweeping attack on the payday loan industry, noting, "Eliminating a major short-term credit option for financially stressed adults is hardly an act of mercy. We should be helping Americans find more debt management options--not taking them off the table." In fact, Miller is among several authorities who find payday loans to be a valuable option for consumers. Dr. Tom Lehman, a renowned professor of economics at Indiana Wesleyan University, said companies that offer cash advance payday loans make "small loans available to mass sectors of the population, and particularly the poor, that would not have had access to credit of any kind in the past." And a study conducted by the Federal Reserve Bank of New York concluded, "Payday lenders raise household welfare by relaxing credit constraints."
Better than Banks?
One of lawmakers' most commonly voiced complaints about cash advances is that the interest rate associated with them is too high and takes unfair advantage of borrowers in desperate situations. In lobbying against the industry, many politicians have taken to citing an interest rate of 400 percent--a figure put into circulation by the Center for Responsible Lending, an anti-payday loan coalition, that simply isn't accurate. That's because CRL based that claim on the annual percentage rate, or APR, associated with long-term loans. In those cases, interest is collected with each monthly payment, adding up to a much bigger total by the end of the term. But because short-term lenders like Find Payday Loans collect payments at the end of two-week pay periods, the interest that's charged is exactly what it's presented as. For example, if someone took out a $100 loan at 20 percent interest, the service charge when the loan is paid in full would be $20. To truly pay 400 percent interest, a borrower would have to roll that loan over every two weeks for nearly a year. "The Center for Responsible Lending uses fear numbers like 400 percent interest that have no basis in this reality to try and receive a cheap political point," Miller said, adding that he feels CRL's claim is "intellectually dishonest."
Supporting Miller's assessment of the situation is Ohio's Hamilton Journal-News, which stated in an editorial, "Payday lenders provide a service that--believe it or not--is cheaper than what the bank offers in some cases. [State lawmakers] need to be going after the banks that got our bailout money but refused to lend to us."
A Comparative Steal
Even if one accepted the method of calculation that led to CRL's 400 percent conclusion, the cost of a typical loan through Find Payday Loans beats that of other common services hands-down. For example, if you were charged a $37 late fee on a credit card with a $100 balance, the annual interest rate would amount to 965 percent. Being hit with a $46 turn off/reconnect fee after making a late payment on a $100 utility bill works out to an APR of 1,203 percent. And if you were charged $54 in overdraft and merchant fees for a bounced $100 check, you'd be paying an APR of 1,409 percent.
