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Payday — loan outlets and your finances

Ebony, Sept, 2005

IT'S a business that didn't even exist 15 years ago. But today, there are more than 10,000 payday-loan outlets that comprise a $50-billion-a-year industry. For many customers, these short-term, unsecured consumer loans that are repaid on payday, serve as a successful solution to cash emergencies, and an alternative to bouncing checks or borrowing money from family or friends. But at what cost?

With an average annual percentage rate (APR) of 474 percent, (and some lenders charging interest as high as 871 percent), payday loans can result in a vicious cycle that has been described as the equivalent of trying to run up a down escalator.

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While the industry paints a picture of its customers as middle-income families who need a short-term solution to a temporary cash-flow problem, a stroll through Black working-class neighborhoods reveals a truer reality--predatory practices used to lure minorities into a cycle of debt.

It has been estimated that Black neighborhoods have an average of three times as many payday-loan locations as in White neighborhoods. Usually lured in with sound bites of "fast, no hassle cash with no credit check,' payday customers on average are less than 45 years old, female and have an annual household income of $25,000 to $50,000. But when the jingles stop, a payday loan many times is nothing to sing about. A payday loan is really a person's willingness to write a check without money in the bank to pay triple-digit interest rates, to grant complete strangers access to their bank accounts, and to run the risk of being unable to repay in full within days.

Federal and state governments are looking into predatory practices in the payday lending industry, and some 20 states have capped interest rates lenders can charge. Even so, financial experts say there is a need to educate consumers to steer clear of spending beyond their means. Here are some truths about payday loans: Know your financial alternatives

While "emergencies" likely constitute the single-largest reason for most loans, defining what constitutes an emergency needs further examination. Going to the club this weekend does not constitute a financial emergency. But if you do have a true financial emergency, is a payday loan the only choice you have?

If you have bad credit, no emergency cash, and little or no immediate access to lower-cost credit, than maybe so. But most people have other resources that they can tap into first.

Know what these loans really cost

Here is how most customers see the "cost" of a payday loan, and why they don't necessarily view that cost as burdensome: You want $50. The fee is $7.50. The total amount to be repaid in two weeks is $57.50. The perception is that this is a reasonable cost. But the reality is, because you only borrowed the money for two weeks, you are paying a triple-digit interest rate. Lenders don't help the understanding process, often giving consumers false or misleading information about the cost of the money borrowed.

Understand the risks

A payday loan is not simply a paycheck advance. It's a loan. Because the industry frequently uses the term "payday advance," many customers do not understand that it is a credit transaction. Some payday lenders also require borrowers to agree to mandatory arbitration for payment disputes, which in essence means that they could garnish your paycheck if you don't pay off the loan payment. They also subject customers to horrific collection practices including harassment, and sometimes even threatening violence and criminal prosecution against customers unable to repay.

Payday — loan outlets and your finances

Ebony, Sept, 2005

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