Payday Loan
Introduction - Payday loan - Revolving
Credit - Open End Credit - Cash
Advance - Interest
Mortgage - Credit card - Internal - Loan - Payday loan - Loan to Value
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Payday loan
A payday loan or paycheck advance is a small,
short-term loan (typically up to US$1,500) that
is intended to bridge the borrower's cashflow gap
between paydays. Payday loans are also sometimes
referred to as cash advances, though that term
can also refer to cash provided against a
prearranged line of credit such as a credit card.
Process
The loan is typically given in cash and secured
by the borrower's post-dated check that includes
the original loan principal and accrued interest.
The maturity date usually coincides with the
borrower's next payday. On the maturity date the
lender processes the check traditionally or
through electronic withdrawal from the borrower's
checking account if the borrower does not first
repay or service the loan in person.
Payday lenders typically operate small stores or
franchises, but large financial service providers
also offer variations on the payday advance. Some
mainstream banks offer a "direct deposit
advance" for customers whose paychecks are
deposited electronically. When a consumer
requests the direct deposit advance they receive
a predetermined, small cash advance. On the next
direct deposit into the consumer's bank account
that advance amount is removed by the bank plus a
fee for the advance (usually around 10-20%).
Income tax preparation firms including H&R
Block partner with lenders to offer "refund
anticipation loans" to filers.
In the United States, most states have usury laws
which forbid interest rates in excess of a
certain APR. Payday lenders operate in those
states by funding loans through a bank chartered
in a different state. Under the legal doctrine of
rate exportation, established by Marquette Nat.
Bank v. First of Omaha Corp. 439 U.S. 299 (1978),
the loan is governed by the laws of the state the
bank is chartered in. This is the same doctrine
that allows credit card issuers based in South
Dakota and Delaware — states that abolished
their usury laws — to offer credit cards
nationwide. [1]
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Example
For example, a borrower seeking a payday loan may
write a post-dated personal check for $115 to
borrow $100 for up to 14 days. The check casher
or payday lender agrees to hold the check until
the borrower's next payday. At that time, the
borrower has the option to redeem the check by
paying $115 in cash, or refinance ("roll-over")
the check by paying a fee to extend the loan for
another two weeks. If the borrower does not
refinance the loan, the lender deposits the check.
In this example, the cost of the initial loan is
a $15 finance charge, or 391 percent APR. Many
states do not allow rollovers or limit the number
of rollovers but, for example, if the borrower
chooses to roll-over the loan three times, the
finance charge would climb to $60 to borrow $100.
[edit]
Controversy
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.
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.
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Introduction - Payday loan - Revolving
Credit - Open End Credit - Cash
Advance - Interest
Mortgage - Credit card - Internal - Loan - Payday loan - Loan to Value
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