Meet the Predators: Payday Loans and Payday Lenders

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When it comes to payday loans, it’s safe to say the United States is suffering from a severe infestation.

Payday lending is the most prominent and well-publicized form of predatory lending in America. There are over 20,000 brick-and-mortar payday loan lenders across the nation.3 And that number doesn’t even take into account all the payday lenders that operate online. When it comes to payday loans, it’s safe to say the United States is suffering from a severe infestation.

How Payday Loans Work

Ask a payday lender, and they’ll tell you their loans are only meant to tide you over until your next paycheck. Payday loans are short-term loans with an average repayment term of 14 days. Because they are designed for “short-term use only,” payday loans are for relatively small amounts of money. It depends on the individual lender, as well as the state that that lender operates in—each state regulates payday lending differently—but a payday loan principal amount is generally around $500.

  • Extremely high interest rates
  • Short repayment terms
  • Unnecessary additional fees
  • Failure to disclose important information about the loan

Payday loans are popular because they are very easy to get. Oftentimes, the lender needs little more than a borrower’s post-dated check and valid photo ID in order to approve a loan. In many cases, the borrower will simply write a post-dated check to the lender for the amount borrowed plus fees and interest. The lender will then hold that check until the loan’s due date, at which time they will cash it and the loan will be marked as “repaid.” Some lenders skip the post-dated check and simply collect the routing information for the borrower’s checking account. When the loan is due, they have the funds automatically withdrawn.

The average cost of a payday loan is $15 per $100.4 This is the interest rate for the loan, although it’s often referred to as a “finance charge.” Many lenders will charge additional fees on top of this—sometimes as a way of getting around laws governing interest rate caps—which can increase the overall cost of borrowing.

Why are Payday Loans Predatory?

When taken as a simple interest rate, the cost of a payday loan doesn’t look so bad. A charge of $15 per $100 borrowed? That’s an interest rate of 15 percent, which might not sound too bad. But this is why you should look instead at a loan’s APR to find out its true cost. Because when compared with other personal loans, the APR for payday loans is eye-popping.

With an average term that’s only 14 days long, the APR for a payday loan that cost $15 per $100 borrowed would be 390%. That’s right, 390%! That’s over 10 times more expensive than a standard personal loan!

Because of their short terms, many payday loan borrowers have trouble paying their loan back on time. Multiple studies have shown that these borrowers either end up taking out a new loan immediately after paying back their old one, or extending the original loan for an additional fee.

While payday loans are designed to be for short-term use only, the truth is that many customers end up staying in debt for a long, long time.

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