There are a lot of myths on payday loans especially in the US. Many people, including some regulators believe that these loans are bad for consumers because they make them go into a cycle of debt. Let us do an honest and straightforward examination of payday loans to find out whether there is any truth in these claims.
Myth #1: Small dollar or payday loans are very expensive. The interest rate is exorbitant.
Reality:
Payday loans are just for a couple of weeks. They aren’t annual loans. Critics will often tell you that these advances charge a 391% annual interest rate. This is misleading.
Usually the fee is $15 per for each $100 you borrow. In other words, it is 15% for 2 weeks. There is just one way of reaching triple digit APR, and that is by extending the two-week loan by 26 times for the full year. However the industry best practices and state laws don’t allow this. In fact, many states don’t even allow a single rollover, and the states that allow it, the CFSA limits rollovers to the state limit or 4, whatever is lower.
Myth #2: These loans trap borrowers. They get into a cycle of debt.
Reality:
Many studies have proved otherwise. After an extensive study, Clemson University concluded by saying that there’s no statistical evidence that supports this debt argument that is raised often to pass laws against payday lending. The American Payroll Association carried out a study in 2010. According to its findings, 71.6% American employees live from one paycheck to the next.
Most families cannot absorb unexpected expenses without taking a loan for the short-term. Most Americans take payday advances responsibly. Public company filings and regulator reports confirm that more than 90% of such advances are paid back successfully at the right time.
Myth #3: Payday lending companies target minorities and poor people.
Reality:
These lenders offer money to a wide cross section of the population as the demand is widespread. You will find payday loan stores in population centers conveniently located where people work, shop and live.
Increasingly, credit unions and banks are unable to serve financial requirements of communities. A FDIC survey carried out in 2009 found that 73% banks are aware of the significant underbanked and unbanked population, but less than 18% have planned to expand their services to reach these people.
Myth #4: Payday lenders don’t want to be regulated.
Reality:
A vast majority of payday loan companies have always supported balanced and responsible regulations that protect both the business and consumers. Most lenders including the one who work with us are members of Online Lenders Alliance (OLA). And adhere to their responsible lending guidelines.
Myth #5: By charging high fees, payday lenders make billions of dollars.
Reality:
Most banks don’t offer short-term and small dollar loans as it is expensive to get clients who want these loans. Maintenance is expensive too. The Federal Reserve Report of 1999 discovered that no matter what the size of the loan, banks have to spend $174 to get a loan funded.
The Fordham Journal of Corporate & Financial Law ran an article where they mentioned that the payday advance fees don’t deliver high profits. It concluded by stating that the relatively higher fees are justified when the high operating costs of payday business are taken into consideration.
According to an analysis carried out by Ernst & Young, LLP in September 2009, the profit of payday advance companies is $1.37 on $100 before taxes.
Myth #6: Payday lenders offer money to people who cannot pay back.
Reality:
Is this even believable? Which lender will like this? There is no business in offering money to people who cannot repay.
All good payday companies have the underwriting criteria. Plus, the applicant needs to have a checking account and steady income. Many state regulatory reports have confirmed that 95% of these loans are repaid on time.
Myth #7: Payday lenders coerce their clients for collections.
Reality:
All reputed payday lending companies use lawful, fair and professional means to collect past dues – including our lenders. There are ways to file complaints if any company is using inappropriate and illegal means. Do not hesitate to file your complaint if you see something like this. You can file your complaint here: https://www.bbb.org/consumer-complaints/file-a-complaint/get-started
Myth #8: The growth of payday loans is attributed to aggressive marketing.
Reality:
The real reason is a strong consumer demand and the inability of the banks and conventional lenders to offer small dollar loans. Only aggressive marketing cannot make it grow, if there is no inherent strength in it.
Myth #9: Payday lenders mislead consumers and hide fees.
Reality:
These loans are among the most transparent advances in the financial service market. The fee structure is clear and understandable. Surveys have revealed that 95% of customers are aware of the loan fees. Unlike some other loan option, with payday loans, there is no application fee. There are no balloon payments, accruing interest or hidden charges. The cost is always fully disclosed. The terms are clearly mentioned in lending agreements. All reputed companies fully comply with the Truth in Lending Act (TILA) and the Online Lenders Alliance (OLA).
Myth #10: Those who oppose payday lending have the best interest of consumers in mind.
Reality:
The world is sadly not so simple. Many of these activists belong to interest groups that are funded by agencies who can prosper financially if consumers turn away from payday loan businesses. Also, quite often, these activists don’t represent the views of millions of consumers who ask for credit from payday advance companies, use this money and repay responsibly. More than 19 million homes take payday loans in a year. Policymakers would surely have heard a lot more from them if there was widespread discontent.
Myth #11: Consumers will gain if there are more regulations on payday lending.
Reality:
A FDIC National Survey of unbanked and underbanked households carried out in 2009 reveals that 43 million adults in the United States live in homes that seek alternative financial help occasionally, even though they have their bank accounts. So a high number of consumers appreciate financial options. Taking away credit access does not help anybody. Activists who are anti-business should not be allowed to decide what’s wrong and what’s right for hard-working people. Nobody has the right to force consumers to take more expensive credit.
Myth #12: People use these loans frivolously. They end up deep in debt.
Reality:
A huge majority of consumers use these loans for an unexpected expense. The loans are usually not taken to splurge money or on impulse purchases. The George Washington University School of Business carried out a study titled, “An Analysis of Consumers’ Use of Payday Loans” and published the report in January 2009. The study concluded by saying that half of all consumers consider different credit sources, including credit union, credit cards and banks, before opting for a payday loan.
Myth #13: Payday advances reduce welfare of consumers.
Reality:
A study carried out in 2010 says that consumers will face personal difficulty and substantial loss if payday loan access is restricted. It would lead to disconnected utilities, bounced checks, inability to pay rent, lack of funds in real emergencies like car repairs and medical expenses.
Further, researchers at the University of Chicago have noted that payday lending can offset foreclosure increases significantly during natural disasters. Another 2007 study says that payday loans actually help people avoid bankruptcy. More consumers have filed for Chapter 7 bankruptcy in states that don’t allow payday loans.
Myth #14: Payday loans are responsible partly for the financial crisis.
Reality:
Critics have blamed these cash advances even for the recent financial crisis. The fact is that, the government had to put in billions of dollars to bail out many financial institutions. But the payday loan industry stayed committed to offering credit to the millions of hardworking Americans, and that too without collateral. These businesses took all the risks on themselves to help their clients.
An average payday loan is just about $345. The financial obligation is substantially less than the average credit card debt of $7,000 and average mortgage, which is $225,000. So how much impact can there be on the economy?
Myth #15: Credit unions and banks offer cheaper short-term and small dollar loans.
Reality:
There is a lot of demand for unsecured small dollar loans. But the alternatives are different products. The fee structure and terms are different than payday advances. Most of them come with different restrictions. The fee structure is complicated too. Almost all alternative efforts to offer these loans are either through government subsidies, charity based, unprofitable, unsustainable, or they are not available to the vast majority of people.
There was an FDIC 2 year pilot program that urged banks to offer advances like payday loans. A few banks showed interest. However they discontinued the payday alternative after the 2 year pilot program ended.
Fact is if they offered a cheaper option, why would millions of Americans apply for payday loans even today? Everybody is at the least educated enough to understand the interest rates, the payback policies and the ease of getting loans from any source. If there were cheaper options available elsewhere, payday loan industry would have experienced a silent death many years ago – but it is still prospering and growing.
Thank you for visiting our website. Hope we helped you get a loan.
Many thanks for everything!