A fast cash advance with no credit check sounds like a good solution to a surprise car repair or a large phone bill, but not when paired with large fees and interest rates of 300%-1000%.
This is payday lending, and in the current economy these businesses are making millions annually from people already struggling to make ends meet. Today, it is estimated that there are 12 million Americans in debt each year from loans, the majority to the payday lending industry.
The Federal Truth in Lending Act, written in 1968, requires these lenders to disclose the cost of their loans, including the fee and interest. However, even with this information, the total costs of these loans may not seem as extreme as they really are.
The Center for Responsible Lending reports that the average $300 payday loan will increase to $466 before it is repaid and, although the loan is intended to be paid back in two weeks, the average borrower will remain in debt for over 6 months. The FDIC says that no borrower should be in debt for over 90 days, but clearly payday lending is a different story altogether.
Payday loans are so costly that in 2009, the Federal Trade Commission released a consumer alert, urging people to consider alternatives to these ”convenience” loans.
Part of the problem with payday lending is the lack of requirements to receive a loan. In Michigan, in order to get a loan of up to $600, a borrower is only required to show identification, a steady source of income and an open bank account. The payday lending businesses typically do not check credit scores or consider the ability of the borrower to pay back the loan amount based upon their income and other debts they have already incurred.
The results are predictable: 76% of payday loans involve repeat borrowing in order to cover the payments of an earlier loan. People are forced deeper into debt by the predatory lending, especially in lower income neighborhoods where the industry gets many of its borrowers.
In recent years, there has been encouraging legislation in some states that has put a double-digit cap on payday lending interest rates. North Carolina and Georgia have banned payday lenders entirely, but residents in those states can access on-line lenders. Michigan lags somewhat behind the curve in regulating payday lenders.
While government regulation can mitigate some of the damage payday loans can cause, the only way to solve the problem in the long term is to provide potential borrowers with alternatives that are fair and affordable.
Community Development Credit Unions like Community Promise are committed to providing loans that ultimately will help their members, particularly those who live in older, urban neighborhoods that have no traditional banks or credit unions. CDCUs are also committed to financial literacy programs that will help members make smart financial decisions. By providing a full range of banking services with financial education programs, Community Promise will help members build a better future rather than facing the downward spiral of debt and despair that comes all too often from payday loans.
For more information on the lure and perils of payday lending, you can visit these sites: