Loans description
As a form of subprime lending,
similar to high interest rate credit cards, payday
lending is the subject of controversy. Some critics
claim that payday lenders target the young and the poor,
near military bases and in low-income communities, who
may not understand the time value of money. Others go
further, comparing payday lenders to loan sharks due to
high interest rates — typically 250% or more when
annualized. There have been reported cases in which
payday lenders have pursued criminal bad check charges,
despite the fact that they (presumably) knew the check
was bad at the time when it was written. Likewise, it is
argued that the interest rates on payday lending (and on
rent to own) unfairly disadvantage the poor, compared to
the middle class who pay at most 25% or so on their
credit cards.
Defenders of the higher interest rates note that payday
loan processing costs do not differ much from their
higher-principal, longer-term counterparts such as home
mortgages. They argue that conventional interest rates
at these lower dollar amounts and shorter terms would
not be profitable. For example, a $100 one-week loan, at
a 20% APR (compounded weekly) would generate only 38
cents of interest, which would fail to match loan
processing costs. In certain circumstances payday loans
will actually save the borrow money, if for example they
are facing multiple insufficient fund (bounced check)
fees, and offer the borrower an alternative, albeit an
expensive one.
A study by the FDIC Center for Financial Research found
that “operating costs lie in the range of advance fees”
[collected] and that, after subtracting fixed operating
costs and “unusually high rate of default losses,”
payday loans “may not necessarily yield extraordinary
profits.” Based on the annual reports of publicly traded
payday loan companies, loan losses can average 15% or
more of loan revenue. Underwriters of payday loans must
also deal with people presenting fraudulent checks as
security or making stop payments.
Payday loan makers also argue that the interest on a
payday loan is less than the costs associated with
bounced checks or late credit card payments. For
example, bouncing a $100 check may inccur an NSF fee
from the bank of $28 and a returned check fee of $25
from the merchant.
In comparison, when expressed as APRs for two-week
terms:
$100 pawn loan with 20% service fee= 240% APR;
$100 payday advance with $15 fee= 391% APR;
$100 bounced check with $48 NSF/merchant fees = 1,251%
APR;
$100 credit card balance with $26 late fee = 678% APR;
$100 utility bill with $50 late/reconnect fees = 1,304%
APR. |
