Trying to find good information about the reality of the payday loan industry can be difficult. Many vocal opponents have accused our industry of bad practices, creating myths that simply don’t hold up after a close look at the facts.
Check `n Go, a leader in the payday loan industry, has worked closely with the Community Financial Service Association of America (CFSA) to clear the air and shed some light on some false assumptions about the entire payday loan industry. Here are some common myths you may see about payday loans and the reality behind them:
1. Payday loans interest rates are inflated to gouge the borrower.
When critics claim that a payday loan charge is 300% annual percentage rate (APR) or more, that can sound pretty shocking out of context. However, it’s important to keep in mind how misleading that claim is when it comes to payday loans.
APR literally represents the interest charged over the course of a full year. This isn’t how a payday loan works. The course of a payday loan, from the time you receive your loan until it’s time to pay it back, is generally two weeks. The Federal Truth In Lending Act requires lending institutions to fully disclose the terms of a loan to a borrower. All fees and interest earned must be shown in terms of APR.
The average fee charged by a payday lender like Check `n Go is a flat $15 per every $100 borrowed. The charge on a short-term loan is commonly misunderstood when viewed solely in terms of APR. Attention to the APR, without any real explanation as to how it is being calculated, is often misleading to the consumer.
If other common fees were explained in terms of APR, most consumers would be shocked. Consider the following examples:
- $100 payday advance with a $15 fee = 391% APR
- $100 bounced check with $54 NSF/merchant fees = 1,409% APR
- $100 credit card balance with a $37 late fee = 965% APR
- $100 utility bill with $46 late/reconnect fees = 1,203% APR.
Don’t be fooled! The only way to truly be charged 300% for your payday loan is to roll it over twenty-six times, or over the course of a full year. This is simply unrealistic in most instances, as we explain below.
2. Payday loans trap people in a “cycle of debt”.
Every state has different regulations for payday lending. Some states don’t allow you to rollover your loans at all, making the cycle impossible. In states that do, CFSA members like Check `n Go limit rollovers to four-or the state-dictated limit-whichever is less.
Even with state regulations and the CFSA best practices in place to keep you safe, it’s important to stay informed, watch your budget and be responsible with your borrowing. It’s also very important to make sure that you only borrow from reputable lenders. That’s why the CFSA and Check `n Go both provide you with helpful resources for managing your finances.
3. Payday loans are designed to exploit low-income families.
While it is frequently stated that the payday loan industry seeks to take advantage of low-income individuals and their families, this simply misrepresents the actual users of payday loans. Every Check `n Go payday loan requires proof of employment and an active bank account to be issued. After the loan has been made, both federal and CFSA-instituted regulations are in place to keep borrowers on track to quick, penalty-free payday loan repayment.
In reality, payday loan customers represent the hard-working core of America’s middle class. CFSA research shows that their incomes range from $25,000 to $50,000 annually, that 94% have a high school diploma or more, and that 56% of payday loan consumers have attended or graduated from college. Payday loan borrowers are educated, employed people who typically have families to support, who occasionally use payday loan to help bridge the gap between bills.
4. Payday lenders charge high interest rates to make huge profits.
This is a common misrepresentation of the payday loan industry. When compared to competing lending options, payday lenders fall short in terms of profitability. Small, short-term loans are expensive to provide and maintain relative to the demand. A recent study cited by the Buckeye Institute concluded that the average profit margin for payday loan only stores was only 3.57%. Your typical commercial lender has a profit of 13.04%, which is much higher than your local payday lender.
5. Payday lenders hide fees and terms dishonestly.
The Truth in Lending Act requires that lenders provide up-front, full disclosure of terms and conditions. In addition, the CFSA Best Practices and Consumer Bill of Rights make sure that all CFSA approved payday lenders put consumer education and empowerment first. Check `n Go proudly wears the CFSA seal and offers full descriptions of all its terms and conditions.
When you need a payday loan, it’s important to read all the fine print and to make sure that the lender is legitimate. One of the easiest ways to do this is by only borrowing from a CFSA approved payday lender.
6. The payday lending industry preys on those deep in debt.
The growth of any business depends on consumer demand and the payday loan industry works exactly the same way. Payday lenders offer a valuable service that most banks and other lenders have stopped offering. Payday loans providers exist because there is a genuine need in the community they are able to provide. With state-to-state regulations and constitutional amendments delegating the fair and ethical treatment of loan consumers, the idea that the payday loan industry is predatory is a distorted, inaccurate picture of the reality of the business.
7. It costs less to pay overdraft fees than to choose a payday loan.
In addition to being more expensive than a payday loan, overdraft and late fees are applied to your credit card or bank account without immediate notification. This can leave you with an unpleasant surprise the next time you open a bill or look at your account statement. With a payday loan you know your rate, a one-time flat fee, before you sign, every time.
A payday loan fee, on average, is typically around $15. Compare that with a typical bank account overdraft fee ranging from $30-$54 and a credit card late fee which can be upwards of $37. Then there’s the alternative** of simply not paying your bills on time. Late bills often result not only in late fees, but in reconnection fees as well.
A payday loan, when used responsibly, can often be the smart alternative** to these truly expensive fees.
8. Those opposing the payday loan industry have the consumer’s best interest in mind.
Anti-payday lender activists seek to eliminate what short-term credit options remain available to those who need them. There is no way that those various organizations opposing payday loans can speak with one voice that represents all customers who continue to use payday loans the way they were meant to be used: with responsibility falling equally on the lender and the borrower.
9. Payday lenders use aggressive collections practices.
Companies, like Check `n Go who follow the “CFSA’s Best Practices” are dedicated to practicing all collections in the best way possible. We strive to educate the consumer and to make sure that our borrowers clearly understand the payday loan process. Our ultimate goal: only lending to borrowers who are able to use a payday loan responsibly.
If collection on an account becomes necessary, Check `n Go always handles the process in a fair, lawful, and most importantly, professional manner, involving no criminal actions. If absolutely necessary, and after all other approaches have been tried, the lender may turn the issue over to a collection agency.
10. Communities will be better off if payday lenders are forced out of business.
Without the availability of payday loans, many hardworking individuals who simply need occasional help making ends meet would have no real options. This would inevitably lead to an increased number of bounced checks, late fees, and overdraft fees for these individuals, creating further expense and greater debt for them in the long run.
Anti-payday activists are attempting to make decisions for the community at large and remove options for people who work hard who just sometimes have to find a responsible way to stretch their budgets. Communities prosper when their citizens are given a variety of options that simply allow them to make the best financial choices for themselves.
Interested in learning more payday myths and the reality behind them? Statistics and figures in this article were references from The Community Financial Services Association of America (‘CFSA’) and the Buckeye Institute.