Payday Loans Exposed: How 'Short-Term' Lenders Create Long-Term TroublesThe Center for Responsible Lending has released a new report about payday loans, and the picture it paints is seriously depressing. What's worse is that the report published Thursday actually understates the grim reality facing payday borrowers today.

For the uninitiated, a payday loan is a particularly expensive way to pay bills. In principle, the idea is simple: The company lends the borrower money for whatever their immediate need is, charges a fee, and then a few days later, on payday, the borrower pays the loan back in full.

If that were all that happened, it would be hard to see the harm. That's why the industry markets itself as a type of very short-term credit. The industry's trade group counsels: "[A] payday advance is inappropriate when used as a long-term credit solution for ongoing budget management." But the report found that only 15% of payday borrowers were one-time users.

In fact, the CRL documented that payday loans don't usually end on that first payday. The center tracked 11,000 borrowers for two years, and even including the one-time users, found that during those two years, the borrowers on average had a payday loan out for more than a year. Moreover, the report found that 90% of the time a new loan was taken, it was taken out during the same pay cycle the last one was repaid, essentially rolling over the debt.

Payday loans have to be paid back in full at the end of each payday cycle, which tends to leave the borrower short the next week, so she takes out a new payday loan, racking up a new fee. Those fees are steep: $15 to $20 per $100 borrowed, which if done two weeks in a row works out to about 400% interest annually. In fact, the loan terms are so abusive that payday loans are illegal in 17 states and Washington D.C. They can't be made to active-duty service members, either.

The punishing nature of the loans was made clear by other data in the report. While some borrowers stopped using payday loans in the first year, the people still using them in year two tended to take out bigger loans more often, showing that their debt problems were growing worse. And across both years, nearly half the borrowers failed to pay off the loan at least once, incurring substantially more fees and adding to their financial stress.

'Money Really Does Grow on Trees' -- for the Lenders

Unfortunately, the data in the report almost certainly significantly understate the problems inherent to payday loans for two reasons.
First, the data were collected between 2006 and 2008, before we hit the worst of the Great Recession. How many more families have turned to these loans since then? Second, the data come from Oklahoma, which has relatively strict rules on payday loans -- the key word being "relatively." Less-regulated states are likely to have worse borrower experiences.

According to the industry trade group, some 19 million Americans use these loans each year. Many more are surely tempted: A full 72% of Americans say they would have at least some difficulty paying bills if they missed a paycheck, according to a 2010 survey.

And boy, does the industry make the loans sound great. For example, a website I found Googling "payday loans" boasts:
"Regardless of your past, if you are currently employed and have a bank account, we can help you when it matters most. Have some bills due and you are not getting paid until next week?? Avoid the high cost of bounced checks from your bank and get a quick and easy Cash advance or a Same Day Payday Loan. ... At [the website], Money really does grow on trees!!"
The trade group does have a point, however, about the abusiveness of certain other types of credit:
$100 payday advance with a $15 fee = 391% APR

$100 bounced check with $56 insufficient funds and merchant fees = 1,449% APR

$100 credit card balance with a $37 late fee = 965% APR

$100 utility bill with $46 late and reconnecting fees = 1,203% APR
That's why consumers should seriously consider opting out of the "overdraft protection" plans provided by their banks. The fees involved -- even if they're $35 instead of $56 -- are ludicrous, and kick in for any transaction, no matter how small. Credit card fees are ridiculous too, but for better or worse, debtors don't have to pay off the whole principal each month, which allows them to manage the cash flow problems caused by late fees better than they could with with payday loans, at least for awhile.

If you want to preserve your financial health, don't use payday loans -- period. And do whatever you can to avoid falling victim to the abusive credit charges of other types of lenders, too.

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April 06 2011 at 3:04 PM Report abuse rate up rate down Reply

Hey, no one is forcing these irresonsible boobs to borrow from paydaylenders. Why does the government think it can control every aspect of our lives? Take away this industry and the mobs (Mafia, Russians, Asians, etc) will go back to loan sharking. The Nanny State is all powerful, according to liberals.

April 02 2011 at 10:11 AM Report abuse -1 rate up rate down Reply
Hi Nancy

why don't people just live within their means--then there wouldn't be a need for payday loans and credit cards. Stop spending America....the worst is still on its way!

April 02 2011 at 9:08 AM Report abuse rate up rate down Reply
1 reply to Hi Nancy's comment

Kinda tough to live within your means when goverment at all levels takes 50% of your income away.

According to the IRS - the median personal income for all people between the ages of 18-65 - was $25,149 in 2010. That means half the people in this country make less tha $12.09 per hour. ($483.63 before taxes - $372.40 after taxes - between $332.40 after taxes and health care ($40.00 typical for a single person plan) and $252.40 after taxes and health care ($120 per week for a married with family plan). Now further subtract the typical commute consuming 20 gals a week in gas, ($70 a week at $3.50 per gal) - $182.40 - $262.40. Try and "live within your means on the top side of what the bottom "50%" live on. Oil change, flat tire, someone throwing a rock through your widow, the $25 co-pay if your kid gets sick and goes to the doctor, the price of oil goes up to heat your home, a heat wave of cold blast, your rent goes up, any even the tiniest of expense increase and you're sinking. I bet you couldn't "live within your means if you only had that much at the end of the week"

April 03 2011 at 7:57 PM Report abuse rate up rate down Reply

I think that payday lending should be outlawed so that the Mafia can get back into the business again. It just doesn't seem fair that they have been made to suffer as Fortune 500 company's have taken over the loan sharking business and state governments the gambling business. How can a wise guy be expected to make a living today with that kind of competition?

April 02 2011 at 12:50 AM Report abuse +1 rate up rate down Reply

This is something the wealthy can support instead of lmiting themselves to donating food cans,

April 01 2011 at 5:31 PM Report abuse rate up rate down Reply

I can imagine some low income people passing by some merchanidse they want to have but cant buy with those pay day loans.. Let us help them have them , come to think about the poor kids... They want bicycles, CD players, laptops, clothes, etc.. They need some healthy distractions away from the gloomy grey cruel world !!

April 01 2011 at 5:30 PM Report abuse rate up rate down Reply

We can have Uncle Sam credit cards. We can compete with other credit card companies with some limits like only for needy people . Late payments , no problem no fee. We care about you.. we know you will pay back with some interest, of course . Bleeding hearts... for those qualifyng only .. Give those low income guys some break!! I really care about them.. I dong know about those druggies or drunks..

April 01 2011 at 5:28 PM Report abuse rate up rate down Reply

If payday loans is so profitable, I dont see why our govenment cant jump in the fray?? with far better terms than those private ones.. I doubt that borrowers would dare thumb noses at our govenrment with non payments.. Our budgets would be balanced overnight!!

April 01 2011 at 5:25 PM Report abuse rate up rate down Reply
Sam Das

Mike fowl language will not solve this very serious problem. This is going on with the full knowledge of the system and safe guards are needed to protect the needy, helpless and the poor.

April 01 2011 at 12:10 AM Report abuse +1 rate up rate down Reply
1 reply to Sam Das's comment

Might sound good, at least on paper. The problem is that it just doesn't work in the real world. You can't 'protect" people against themselves. Or as the old saying goes "we have met the enemy and they are us".

April 01 2011 at 6:39 AM Report abuse rate up rate down Reply

Since no one is forced to take the lender's money it is really quite easy to avoid paying their fees.

March 31 2011 at 5:29 PM Report abuse rate up rate down Reply