Responsible Lending

With the current state of the economy, more consumers than ever are finding themselves in need of immediate cash funds. If you are one of the millions of Americans who is considering borrowing money, whether it's a payday loan or some other type of loan, it is important to consider all your options before committing to any agreement.

First determine if you truly need the cash. Maybe there are things you can cut back on or do away with altogether in order to free up some extra funds. Consider asking a good friend or relative if they could loan you the money. Check at work and see if an advance on your salary is possible. Look to see if there household items or clothing that you can sell.

The key is to explore all your options before taking on any new debt. If you find that you still need to borrow money, take the least amount possible that will get you through your financial crisis. Make sure you read and fully understand any contract or agreement before you sign it. Be certain there are no blank spaces on any contract. The lender is required to give you a written statement showing what fees you will be charged and the annual percentage rate of your loan before you sign. By practicing responsible borrowing, you can protect yourself from shady lenders and break the never ending cycle of debt.

  1. What is a payday loan?
  2. Who uses payday loans?
  3. What is required to get a payday loan?
  4. How much does a payday loan cost?
  5. How big is the payday lending industry?
  6. Who makes payday loans?
  7. How are payday lenders regulated?

1. What is a payday loan?

Payday loans are normally small cash advances of $500 or less which are required to be fully repaid within a short period of time - usually two weeks. A customer who needs immediate cash funds writes a postdated personal check to the payday lender for the full amount of the loan. The lender then deposits the check on the agreed upon date.

For a $300 payday loan, an individual would write a check for $300 but might get only $255 in cash after the required fees of $45 are deducted. With a repayment time of 14 days, this example loan would theoretically have an APR of 460.08%.

The lender holds the check or electronic debit authorization for the agreed upon time - usually the borrower's next payday. At that time, the borrower can do one of the following: give the lender $300 in cash for the return of the check, allow the lender to deposit the check to cover the loan, or if he/she finds that he cannot repay the loan, the loan can be rolled over for another short period of time and with additional fees.

2. Who uses payday loans?

Payday loans are advertised as a quick and easy method to get immediate cash. The payday loan industry markets these loans to low-income consumers, including welfare-to-work women, military service personnel, and other individuals who have little or no savings and struggle from paycheck to paycheck. Unfortunately, most of these consumers are unable to repay the original loan within the two week period and are forced to rollover the loan. This results in more and more fees being charged. Many borrowers end up paying more in fees than the original amount of their loan.

While payday loans are marketed as a "one-time emergency" solution to an unexpected financial problem, studies have shown that only 1% of all payday loans are made to one-time borrowers. The payday loan industry makes its enormous profit each year from repeat customers who have to continuously rollover their loans.

3. What is required to get a payday loan?

Very little is required to get a payday loan. Most consumers will only need to show proof of identity, have a personal checking account, and supply income verification from either employment or government benefits. Lenders do not require that consumers list their monthly expenses or show any ability to repay the loan.

4. What are the costs of a payday loan?

The normal fee on a payday loan is at least $15 for every $100 borrowed. With such a short period of time to repay the loan, the annual percentage rate can come to nearly 400%. Consumers who have to renew their loans many times end up paying more in fees than what they originally borrowed.

For consumers who use payday loans multiple times throughout the year, this borrowing is really a sign of chronic debt, not helpful credit. The Center for Responsible Lending estimates that payday loans cost the nearly 5 million Americans using them $3.4 billion in fees annually.

With so many payday loan borrowers struggling to repay their loans, it causes them to fall behind with other payments such as rent, mortgage, utilities and even groceries. The cycle continues as these individuals constantly have to renew their payday loans.

5. How big is the payday lending industry?

Payday loan companies saw their biggest growth in the first half of the previous decade, with the peak number of 24,000 storefronts in 2006. There are currently about 22,000 payday loan locations, operating in 36 states. The annual loan volume is estimated to be $27 billion.

6. Who makes payday loans?

Today, the payday loan industry is dominated by large regional or national lenders who offer payday loans only. Some multi-service companies offer additional financial services, such as money orders, check cashing, and bill paying services.

7. How are payday lenders regulated?

Payday loans are currently allowed to operate in 36 states. Individual state laws determine whether these companies are permitted to do business in a specific state. Many states are trying to ban payday loan companies which are considered by many experts to be predatory lenders.