Thursday, July 26, 2012

Payday Lending

The Payday Lending industry has experienced tremendous growth over the past few years. Part of that growth can be attributed to the downturn in the economy. Consumers are running out of money before their next paychecks arrive. Payday Lenders are convenient with extended hours, many locations, and a streamlined process that provides short term cash in a quick manner. A recent seminar speaker recently cited that there are more Payday Lenders out there than McDonald’s restaurants. Payday Lenders are a legal business like any other lender and they fully disclose the fees and charges associated with their services. The cost may be high for obtaining cash from a Payday Lender but the owners of these establishments are correct in that they are not tricking or disguising their fees. The average fees for a short term loan (2-weeks repayment term) from a Payday Lender are $15-$30 for every $100 borrowed. That equates to an average of 391% to 780% Annual Percentage Rate (APR) cost. Again though, this cost is clearly disclosed on the loan agreements from these Payday Lenders. Consumers who rollover these high cost loans continue to pay these high fees over and over again to a point where the initial amount borrowed is a small fraction of the total amount owed. It often becomes a vicious cycle every pay period where the financial hole just grows larger and larger.

Some would ask why would anyone borrow money at a rate of 391% APR and higher? Some consumers feel they have no other options because of bad credit history. Some consumers feel embarrassed and don’t want their banking institution to know about their financial situation. Some consumers are just unbanked and don’t trust financial institutions. Most obtain these “short-term” loans from Payday Lenders with the full expectation that it will just be a one-time use. The problem is that financial needs continue to pop up and the easy fix is to go back to the Payday Lender.

The key to escaping the financial hole is to realize that there are other options. The credit union has loan options that do provide money to provide short-term funds or payoff these Payday Lender loans. Our Fresh Start Loan for weak to poor credit consumers can provide up to $500 at a much lower loan rate than a Payday Lender, 18% APR versus 391% APR and higher. Credit union members should also not feel embarrassed to come to the credit union for help. That is what we are here for. We are familiar with these Payday Lenders and will do all that we can to end the money pit cycle. It is important to note though that consumers need to do their part also in changing some of their spending habits and working with a financial budget to reduce the possibility of financial stress. Disposable incomes are tighter now more than ever they say so having a plan and sticking to that plan is essential. It’s not easy by any means but the credit union has resources to assist our membership.