Expensive Debt Management with Payday Loans
Short Term Paycheck Loans can Lead to Long Term Debt Problems
Apr 9, 2009
Often seen as a short term solution to financial problems, payday loans can in fact lead to long term debt problems. Repeat use of payday loans leads to a debt treadmill.
For cash-strapped lower income families, the option of payday loans may seem a short term blessing to a pressing financial problem. Unfortunately this form of debt management which is anything but a blessing, can lead to long term debt problems and its targeted market, the underprivileged, African Americans and the military, provide the payday loan industry with a growing market.
The Cost of Payday Loans
Looked at in simple dollar terms, the cost of a payday loan, $15 to $30 for a $300 loan, may seem small, but compared to mainstream lending the rate is astronomical.
- In Solve your Money Troubles, published by Nolo in 2007, the author Robin Leonard states “Payday loans, deferred deposit loans, cash for checks - no matter what they're called, they're a very expensive way to borrow money."
- Smart Debt, by Jason Rich and published by Entrepreneur Press in 2006 argues, “You may pay anywhere from $10 to $30 for every $100 cashed, even if the loan period is only a few days. This translates to an APR of 300, 400, or even 1,000 percent. In other words, using a payday loan should in no way be considered smart debt."
- Internet Payday Lending, by Jean Ann Fox and published by the Consumer Federation of America in November 2004 states, “Check-based loans of $100 to $500 or more cost triple-digit interest rates, typically 390% to 780% annual interest rates for two-week loans with $15 to $30 finance charges per $100 loaned. These single-payment loans are due in full on the borrower’s next payday, typically in two weeks.”
Growth in Payday Loans
The payday loan market is a growth industry in both the United States and Canada.
- Payday Loan Companies in Canada, by Andrew Kitching and published by the Parliamentary Information and Research Services in 2006 estimates, “As of 2004, there were an estimated 1,200 payday loan stores in Canada, although the industry is growing rapidly.”
- The article “Payday Lending”, by Michael Stegman, published in Volume 21 of the Journal of Economic Perspectives claims, “Today, there are more payday loan and check cashing stores nationwide than there are McDonald’s, Burger King, Sears, J.C. Penney, and Target stores combined.”
- “Quantifying the Economic Cost of Predatory Payday Lending”, a report from the Center for Responsible Lending by Keith Ernst says, “The payday lending industry, which was virtually non-existent ten years ago, has experienced explosive growth -- from $10 billion in 2000 to $25 billion in 2003.”
Repeat Payday Loan Uptake
Although marketed as short term loans, payday loans tend to trap the consumer in a cycle of debt.
- Figures from a report from the Ohio Coalition for Responsible Lending, issued in September, 2007, shows, “The average payday borrower uses 7.4 loans per year, per single lender. However, both anecdotal evidence and the available empirical evidence tell us that many payday borrowers visit more than one payday lender in a year.”
- Financial Quicksand, by Uriah King and published by the Center for Responsible Lending in November 2006 states, “The industry relies almost entirely on revenue from borrowers caught in a debt trap; ninety-one percent of payday loans go to borrowers with five or more loan transactions per year.”
Payday loan operators target vulnerable low paid workers, African Americans and the military.
- In Volume 66 of the Ohio State Journal, the article “Predatory Lending and the Military” by Steven Graves states, “A chorus of military personnel and journalists have complained that payday lenders are now flocking to the highways and strip malls near the gates of military bases to feed off the wages of enlisted personnel.”
- Predatory Payday Lending Traps Borrowers, published by the Center for Responsible Lending in 2005 states, “The 22,000 payday loan shops operating nationwide are disproportionately located near military bases and in African-American neighborhoods. These shops are generating excessive interest fees from up to 15 million working families per year.”
The copyright of the article Expensive Debt Management with Payday Loans in Personal Loans is owned by Laurence O'Sullivan. Permission to republish Expensive Debt Management with Payday Loans in print or online must be granted by the author in writing.
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