Payday Loan Times

We spend so much time talking about faxless payday loans, we figured it was a good time to stop for a moment and review various details regarding them:

What is a payday advance loan?
Short-term, small, single-payment loans intended to carry the borrower through a temporary cash deficiency. In exchange for the advance, the lender receives a personal check - dated for the borrower’s next payday - for the amount of the loan and the finance charge.

Why such high rates for borrowing?
The structure of payday advance loans makes them costly to originate these short-term loans, whose default rates substantially exceed the customary credit losses at mainstream financial institutions.

What’s the downside?
Consumer groups sharply criticize payday lenders for selling overpriced cash advance loans to people who are already experiencing financial difficulties. Critics further contend that payday borrowers are not well-informed about the true cost of their borrowing, and that lenders engage in deceptive and unfair practices, particularly practices designed to encourage repeated loan rollovers.

What’s the upside?
The payday loan industry claims to provide a valued service to underserved consumers. Industry leaders note that mainstream financial institutions have withdrawn from the market for very small, short-term loans.

Are borrowers chronic?
Apparently. A 2005 FDIC study concluded fewer than half of a typical faxless payday loan store’s customers took out six or fewer loans per year.

Do lenders prey on the poor and minorities?
Numbers vary. A 2001 study of borrower demographics showed more than half of all borrowers had an average annual income of between $25,000 and $49,999. The study also showed 74.4 percent of all borrowers had either a high school diploma or some college education.

A 2003 North Carolina study revealed, however concluded the incidence of payday borrowing is higher among blacks and among individuals recently involved in the welfare system. Also, the study shows that individuals with impaired credit histories are more likely to use payday loans as a source of funds.

Are these businesses regulated?
Yes. Some states have outlawed the practice, but pay day loan lenders still operate in 37 states with varying regulations. In Alabama, borrowers may not have more than $500 in outstanding loans from payday lenders and loans can only be rolled over once. The maximum 14-day fee for a $100 loan is set at $17.50.

Are payday lenders and car title lenders the same?
Not according to the laws regulating them. Car title lenders have different regulations, as do those businesses that cash checks for a fee.