Payday loans are small, short-term, high-interest loans. Most are less than $400, with a term of two weeks or less. In exchange, the consumer generally pays $15 for every $100 borrowed, or a 360% APR. (Even high-interest credit cards generally charge less than 30% APR.)
Most consumers roll over the loan several times, incurring an additional fee each time. For example, a $300 payday loan rolled over for three months will cost an additional $270 in interest payments.
So why do people use payday loans?
Possibly because there are few alternative for payday loan customers, if any. This is true, although some credit unions have found ways to lend to the same clientele at more reasonable rates. Still, as long as payday loans remain legal and the market fails to provide a widely-available, viable alternative, it looks like consumers will continue to use them.
400 Percent APR—Is That Good? | Slate (via Neatorama & Consumerist)
(photo: slideshow bob)
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{ 2 comments… read them below or add one }
The payday loan companies argue that the reason they can do these high rates is because payday loans aren’t really meant to be compared with other loans or given APRs as they aren’t meant to last for a year, they’re supposed to be short term fees and when compared with the consequences of overdraft fees or late fees on bills, payday loans are supposed to be the preferred alternative to that.
The problem of course being, as you said, most people roll these over tons of times.
The reason more people don’t riot and try to outlaw payday loans (although of course some do) is that, sadly, this fills a gap in the loan industry. As you also said, there is no real alternative.
I keep thinking about it, I wonder if there IS a better structure we could build to fill the gap, and not destroy pepole’s financial futures…
It’s hard to see how loans at a rate of up to 391% (without regulation, and even 36% with regulation) could be considered a fair alternative. Studies have also shown that payday loan shops are disproportionately clustered around military bases. Why? Becus military personnel are often young, financially inexperienced, have little in savings and are far from family and friends who might otherwise advise them to steer clear of payday loan lenders. More on that here: http://www.creditfyi.com/Credit-Library/In-the-Military-and-In-Debt.htm
Actually, the FDIC now has a 2-year pilot study underway with 32 banks that are being encouraged to make loans under $2,500. Here’s the full story: http://www.creditfyi.com/Loans/Personal-Loans/Banks-Foray-Into-Small-Loans-Could-Weaken-Payday-Loan-Industry.htm Let’s hope something comes of it.