What’s in the name?
Payday loans are also called
“cash advances” or “quick cash” or “check loans”
or “deferred presentment.”
Who makes payday loans?
Check cashers, payday
storefronts, and sometimes pawnbrokers. You can
find these locations in strip malls, near
convenience or liquor stores, and in
neighborhoods where there are few bank
branches. Payday lenders also sell their loans
on the internet.
How do payday loans work?
You go into one of these offices
and they usually will ask you to give some
personal information, the names and phone
numbers of “references” (usually friends or
family that they might call if you don’t pay),
your bank account statement and length of time
your account has been opened, your employer
information, and net pay if you don’t have
social security or retirement income.
Then, you must write a check to
the payday lender or agree to have your bank
account debited electronically for the amount
you want to borrow (up to no more than $500 or
so) plus a fee that the lender will keep.
For example, if you are borrowing
$500, the check you must write to the lender
could be for $600. You receive $500 and the
lender keeps $100. The total you owe is $600.
Usually, you must repay this loan in one big
payment of $600 in two weeks. In this example,
the annual percentage rate is 521%.
The payday lender holds your
check to insure that you come in to repay or to
extend the loan by paying another $100. If you
don’t come back in on the due date, the lender
will cash your check. If your account doesn’t
have enough funds to cover this check, the check
will bounce. When this happens, both the bank
and the payday lender will charge you fees. You
may also be in trouble with merchants or others
if the cashing of the payday loan check also
causes other checks to bounce.
What are payday loan abuses?
-
Rollovers: If you
need this money for an emergency or don’t
earn enough to make ends meet, chances are
that you won’t be able to pay this money
back in just two weeks. Remember, the
payment is for the full amount at once.
Payday lenders prefer that you come in and
pay another $100 fee to extend the loan for
another two weeks. You don’t get more
cash---you are just floating the same $500
loan. This process is called a “rollover.”
The payday business model relies upon the
many fees that consumers pay for one loan –
and also, this is where their profits come
from.
For example, say you borrow $500, as in the
example above, and roll it over six times
before you can repay the loan. You pay $600
upfront to get $500 in cash, and owe the
original $600. You also pay six $100 fees
each time you roll the loan over. The total
to payoff the loan after six rollovers is
$600 + $600, or $1,200. You paid $1200 to
get $500! This is not much of a deal, to
say the least.
-
Holding your check:
Payday lenders may also threaten you with
criminal prosecution of a “bad” check if you
don’t pay on time. Your check is not “bad”
because the lender required you to write the
check at the time of the loan even though
you didn’t have enough in your bank account
to cover it. If you had the $500 in your
account, of course, you wouldn’t have gone
to the lender! You haven’t committed a
crime. But many consumers are terrorized by
false threats of criminal prosecution.
-
Internet lending:
Using the internet to borrow money increases
the possibility of harm to you. First,
payday lenders on the internet may not
ensure that your private information remains
private. You don’t know who these lenders
are. Usually, they aren’t physically
located in your state and often aren’t even
present in the United States. They may lend
over the internet in order to avoid the
protections of your state law and to make it
virtually impossible for you or any
government agency to find them.
Other payday lenders may set up
their business as a “cash back ad” or “internet
service.” In the ad scam, you give the store a
check in the amount of cash you need plus a fee
and the store sells you an ad in a small
newspaper (which is never worth as much as the
fee you pay). In the internet version, you are
supposedly paying for internet use at the store
that often has limited hours which makes it
difficult to use the store’s computer.
Consumers should use extreme
caution when obtaining payday loans. Growth in
the payday loan sector has exploded since the
early 1990’s from approximately 300 lenders to
currently around 20,000. These loans can lead to
an endless cycle of compounding debt that
ultimately leads to financial and emotional
devastation of families and the elderly.
Furthermore, the collection practices within
this industry are ruthless. It’s not uncommon
for death threats to be made, illegal
garnishment of social security checks, and
actually attempting to collect by going to the
consumer’s residence. Consumer groups have long
criticized payday lenders for preying on poor
and minority communities where consumers with
credit problems may not understand the high
rates and fees associated with these short-term
loans. The government’s accountability office
has launched investigations into the predatory
lending industry. Exodus America is the only
debt settlement company with a history of
successful negotiations within the payday loan
model. Our highly trained counselors will
empower you and educate you. We will create a
plan that fits your situation. Call
1-800-509-4770 to speak with a credit
professional.
|
