'Short-term' loans are a long-term headache

Payday loans are marketed as two-week loans, but the report concludes they only work as a one-time quick cash solution about two percent of the time.

“They prey on the most desperate working people in our society and I think that’s wrong,” says Nick DiGardo with the Legal Aid Society. He believes a short-term lender should be able to develop a product where they make a profit with a 28 percent interest rate.

“They can’t make the kinds of wildly unfair profit they’ve been making,” DiGardo says. “But they should be able to make a fair profit based on that amount.”

Losing their luster
The new law in Ohio is “a huge deal,” says Jean Ann Fox, director of financial services at the Consumer Federation of America. “The tide has turned on legalizing these high-cost small loans.” Michigan was the last state to allow pay day lending and that was back in 2005.

Last year, Congress capped the annual interest rate for payday loans to military families at 36 percent. And more than a dozen states have taken steps to reign in payday lenders.

• Georgia has the toughest statute on the books. It makes payday lending a violation of anti-racketeering laws.
• Payday loans are no longer permitted in North Carolina or the District of Columbia.
• In Oregon, payday loans are capped at 36 percent, plus an initial fee of $10.
• In New Hampshire, payday loans will be capped at 36 percent beginning in January of 2009.
• Payday lenders pulled out of Arkansas, after the state attorney general told them he would enforce the constitutional cap on interest at 17 percent.

My two cents

Payday lenders like to point out that in Ohio they only charge $15 per $100 borrowed. They say it’s not fair to extrapolate this out to an annual percentage rate (APR). It may not be fair, but it’s federal law. The APR is the only way a lender is allowed to state the price of a loan.

Just for fun, let’s do the numbers the way payday lenders like to do it. The average payday loan is about $300. So the interest charge on that two week loan is $45. If you flip that loan 12 times (which is not unusual) you’d pay $585 in interest to use that $300 for 26 weeks. Is that a bargain or what?

Pay day loans might be an option for some people who have an unexpected cash flow problem. But in most cases, these short-term loans become long-term debt that is paid back at a staggering interest rate.

More Information

• Payday Loan Consumer Information
• Alternatives to Payday Loans
• Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives

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