Would you pay 390% for a $400 loan? Most people would say no. Many, however, are saying yes. In the industry of payday loans or cash advances this is just the case. A payday advance or cash advance works like this. A borrower has a need arise, whether from bills or Christmas shopping, and they need a small amount of money. Now, their payday has just past and their credit it less then perfect. They do not have a savings account, and due to their credit they do not have a credit card either. So they stop in to a payday lender. The borrower writes a check for $460, and they get $400 in cash. The $60 is the fee for the loan. The lender gives the loan for 14 days, which is until their next payday. In 14 days the borrower has a couple of options to pay the loan. The borrower can simply do nothing and let the lender deposit the check for cash, or they can go and give the lender cash for the check. However, there is a third option. The borrower can go to the lender, immediately write the lender another check, and extend the loan. This is called “flipping. There are a majority of borrowers who do end up flipping the loan.
Flipping is a major contributor to the down side of payday loans. This is because this allows the person to extend the loan another three or four times. So, initially the fee for the loan is just $60, but if a person flips the loan another four times the fees have gone up to $240. Over the course of a year a person could accrue more than $720 in fees. That is only if they do the flipping 4 times for 3 times a year. Now this does not include the interest rate.
Interest rates for the small loans can be anywhere from 390 to 900 percent, according to Wikipedia. The interest rate for the 14 day loan of $400, with the $...
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... be done without the borrower ever leaving their home. This is not a good trend.
As long as our society is focused on the material business like cash advance lenders with have a role in it. There are not enough books, classes, or help for the financial uneducated. We need to teach these families that saving a little will ad up to a lot. Society needs to show that saving is a good thing. We must wonder what these borrowers are teaching their children. Will future generation continue the course we are on? We must show them that a national savings rate of zero, or a negative number is not acceptable. We can slow the pace of growth of the payday lenders through financial education.
Works Cited
Bloomberg Marketdata website, rate and bonds. July 25,2007. http://www.bloomber.com
Wikipedia Free Encyclopedia website. July 25,2007.Payday Loan. http://www.wikipedia.org
Loan Flipping: A lender refinances a loan with a new long-term, high cost loan. Each time the lender "flips" the existing loan, the borrower is required to pay points and assorted fees.
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Melzer, B. T. (2011) The real cost of credit access: Evidence from the payday lending market. The Quarterly Journal of Economics.
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