How To Effectively Manage Payday Loans.
Janice Bellamy
August 26, 2011
How to effectively Manage Payday Loans.
In the world of personal finance, payday loans have become the symbol of ultimate financial distress. The payday loan industry suffers from a poor reputation rivaled only by the tobacco industry. Lately, I´ve done a fair amount of research on the economics behind short-term cash advances. In the course of that research, I´ve come across some information and resources you should know if you are considering a payday loan. So in this article we will discuss the cost of payday loans, state regulation of the industry, and some general guidelines on how to evaluate lenders.
Let´s begin with some information that may surprise you. Who is the "typical" payday loan borrower? Here are the stats:
More than 60% of payday loan borrowers are women
The average age of a borrower is 25 to 54
The average annual income is $25,000 to $75,000
Borrowers have checking accounts (typically a requirement for a loan)
Borrowers are employed (also a requirement for a loan)
What payday loans cost
Are payday loans expensive? That seems like a silly question, but believe it or not, the answer is hotly debated among professors, advocacy groups, state legislators, and of course the cash advance industry. Here´s what all the fuss is about.
A typical $100 loan held for 7 days will cost $15. It´s important to understand that the actual cost will vary from lender to lender and from state to state. So, is $15 expensive? Advocacy groups say yes, and use the annual percentage rate (APR) of the loan to support their views. A $15 fee on a 7-day $100 loan results in an APR of more than 700%.
Payday loan industry groups counter that using an APR to evaluate a short-term loan is misleading. They also argue that it is expensive to process short-term loans, particularly once you factor in defaults. In the final analysis, we can all probably agree that we´d rather keep the $15 for ourselves, but spending it once on a loan would not break the bank, either. And this brings us to a critical aspect of payday loans.
State regulation of the payday loan industry
States regulate the payday loan industry in a variety of ways. In addition to disclosure requirements, many states cap the interest rate or fees lenders may charge, limit the number of loans a borrower can obtain each year, or both. Ohio, for example, recently capped payday loan fees at 28% APR. The advocacy groups cheered the legislation while cash advance stores left the state. Some applaud this move, others wonder where borrowers will go to get short term loans now.
I generally take the view that the government should not decide what is best for you and me. Of course, the government does that all the time. Regardless, it´s important to know that in some states, payday loans are effectively outlawed
Chronic payday loan borrowing:
The real cost and risk of payday loans comes in the form of chronic borrowing. Study after study shows that the occasional use of short term loans to address a financial emergency can actually minimize financial loss to the borrower (by avoiding more expensive options such as late fees and bounced checks). The problem arises when borrowers repeatedly tap payday loans to finance a lifestyle they can´t afford.
In fact, many borrowers rollover payday loans, incurring additional fees that amount to more than the actual amount borrowed. And there are some in the industry that encourage this practice by only requiring the borrower to pay back the fee at the end of the loan. The result is another payday loan to cover the principal amount with a second fee tacked on to the total balance.
So In conclusion; are payday loans Good Or Bad? Depending on who you ask. Those against payday loans will say they are bad for you. But every individual who goes for a payday loan must have some immediate financial need that they need to take for. So in my opinion if you really have to borrow a payday loan, do so wisely, and don't borrow more than your paycheck can cover!
Cash In 1 hr
In the world of personal finance, payday loans have become the symbol of ultimate financial distress. The payday loan industry suffers from a poor reputation rivaled only by the tobacco industry. Lately, I´ve done a fair amount of research on the economics behind short-term cash advances. In the course of that research, I´ve come across some information and resources you should know if you are considering a payday loan. So in this article we will discuss the cost of payday loans, state regulation of the industry, and some general guidelines on how to evaluate lenders.
Let´s begin with some information that may surprise you. Who is the "typical" payday loan borrower? Here are the stats:
More than 60% of payday loan borrowers are women
The average age of a borrower is 25 to 54
The average annual income is $25,000 to $75,000
Borrowers have checking accounts (typically a requirement for a loan)
Borrowers are employed (also a requirement for a loan)
What payday loans cost
Are payday loans expensive? That seems like a silly question, but believe it or not, the answer is hotly debated among professors, advocacy groups, state legislators, and of course the cash advance industry. Here´s what all the fuss is about.
A typical $100 loan held for 7 days will cost $15. It´s important to understand that the actual cost will vary from lender to lender and from state to state. So, is $15 expensive? Advocacy groups say yes, and use the annual percentage rate (APR) of the loan to support their views. A $15 fee on a 7-day $100 loan results in an APR of more than 700%.
Payday loan industry groups counter that using an APR to evaluate a short-term loan is misleading. They also argue that it is expensive to process short-term loans, particularly once you factor in defaults. In the final analysis, we can all probably agree that we´d rather keep the $15 for ourselves, but spending it once on a loan would not break the bank, either. And this brings us to a critical aspect of payday loans.
State regulation of the payday loan industry
States regulate the payday loan industry in a variety of ways. In addition to disclosure requirements, many states cap the interest rate or fees lenders may charge, limit the number of loans a borrower can obtain each year, or both. Ohio, for example, recently capped payday loan fees at 28% APR. The advocacy groups cheered the legislation while cash advance stores left the state. Some applaud this move, others wonder where borrowers will go to get short term loans now.
I generally take the view that the government should not decide what is best for you and me. Of course, the government does that all the time. Regardless, it´s important to know that in some states, payday loans are effectively outlawed
Chronic payday loan borrowing:
The real cost and risk of payday loans comes in the form of chronic borrowing. Study after study shows that the occasional use of short term loans to address a financial emergency can actually minimize financial loss to the borrower (by avoiding more expensive options such as late fees and bounced checks). The problem arises when borrowers repeatedly tap payday loans to finance a lifestyle they can´t afford.
In fact, many borrowers rollover payday loans, incurring additional fees that amount to more than the actual amount borrowed. And there are some in the industry that encourage this practice by only requiring the borrower to pay back the fee at the end of the loan. The result is another payday loan to cover the principal amount with a second fee tacked on to the total balance.
So In conclusion; are payday loans Good Or Bad? Depending on who you ask. Those against payday loans will say they are bad for you. But every individual who goes for a payday loan must have some immediate financial need that they need to take for. So in my opinion if you really have to borrow a payday loan, do so wisely, and don't borrow more than your paycheck can cover!
Cash In 1 hr
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