With the explosion in growth of the payday loan service, many so-called watchdogs and consumer advocates have leaped into the fray to charge payday lenders with any number of heinous abuses of hypothetical underprivileged borrowers. Called everything from unscrupulous lenders to loan sharks, most detractors have played on stereotypes and consumer fears. While they have to distort the facts and the figures to portray payday lenders negatively, they rarely focus on the great benefits offered. These elitist do-gooders seem more interested in painting themselves as noble benefactors than in doing a service to those whom they have appointed themselves to protect.
People in need of a bridge loan for a couple of weeks aren’t children in need of a nanny. They are responsible for adults who know what they need and know the costs associated with the loans they need. They are not exploited, uneducated half-wits being taken advantage of. And the facts and figures bear that out. So, it is with an eye to the truth about payday lending, that the following three major myths are explored and exploded:
Myth #1: Payday loans come with “criminally high” interest rates
One detractor of payday loans, an ambulance chaser looking to cash in on a class-action suit has termed the fees associated with payday loans “criminally high” interest. There’s one primary problem with that charge: payday loans are legal in nearly all fifty states! Moreover, they are not interest-bearing notes, rather they come with simple fees for the term of the loan. The average fee per $100 is just fifteen dollars. Critics like to imagine payday loans that go unpaid for a whole year accruing those kinds of fees as if they were traditional loans or credit card balances.
They imagine them going unpaid week after week after week. Truth is seen, most of the states don’t allow a year of transition. Most states limit them and members of the Community Financial Services Association of America (CFSA), The group that represents the interests of payday lending institutions, Allow no more than four extensions. After that, the loan must be repaid. However, if payday lenders did allow rollovers, pay period after pay period, what would the resulting APR be on a $15 service fee?
Three hundred ninety-one percent interest. Does that figure seem exorbitant? It’s about one quarter what banks charge for insufficient funds on an overdraft. It’s about one-third of people who want to know what utilities charge in late fees and reconnection fees. Where they are a reversal in some consumer advocate’s fevered imagination? And it’s about less than half of credit card companies what would be allowed to charge for late fees accrued over a year. Compared to the costs that a payday loan can prevent, everyone else seems to be the ones taking advantage of consumers!
Myth #2: Payday loans are a trap for those in debt
Payday loans plunger consumers into a never-ending cycle of debt!” Well, it might sell newspapers or get people to tune it, but it just isn’t true.
This imagined cycle is legally impossible. Why? Because payday loans are due when a borrower gets paid payday loan, a couple of weeks after the money was wept out! Some states don’t even allow payday loans to roll over, but in those that do, it is limited, as already stated above. The reality is that CFSA members will not let a loan rollover for longer than 8 weeks. And most states limit even those payday lenders who are not members in good standing with the CFSA. So much for a cycle!
Myth #3: Payday lenders take advantage of the disadvantaged
Payday lenders are the modern-day company store that unscrupulously and heartlessly exploits the poor. It’s a charge common to those who want to see America’s middle-class and lower-middle-class families as victims who need a savior. And who will save them? Themselves, no the elitist, self-appointed advocates of the imagined victims. And news outlets around the country have been more than happy to help them perpetuate this perception. What difference do a few clear, contradictory facts have to do with it! The following comes from an objective study done by The Credit Research Center, McDonough School of Business at Georgetown University:
- Poor? The majority of payday borrowers make $25,000 to $50,000 each year!
- Old? 68% are younger than 45 years old. While 20% of the U.S. is over 65, just 4% of payday borrowers are!
- Uneducated? 94% of payday borrowers are high-school graduates, And 56% of them have attended college or are degreed.
- Underprivileged? 42% are homeowners!
- Single mothers? Most of the borrowers are married couples!
- Unemployed? 100% of payday loan borrowers are gainfully employed and have checking accounts.