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Payday Loan Companies are Like Mafia Loan Sharks

by Eric on January 8, 2009

If you are short on cash and need money quick, payday loans might sound good. They are not! Whatever you do, never, EVER, get a payday loan. They are so bad that some states are working to make them illegal. Washington DC was the first place to outlaw these predatory loans.

According to the Consumers Union, rates on payday loans are 911% for a one week loan, 456% for a two week loan, and 212% for a one month loan.

That does not sound like someone a respectable bank would charge, that sounds like something a mobster would charge. Ever worse, most of their customers are repeat customers. The average payday loan customer takes out 11 payday loans per year. These companies repeatedly take advantage of the people who do not know better and are in the worst position.

Payday loan companies have an average APR of 485%. For people in debt, a 485% loan is not the solution. For people in debt, new debt is never the solution. They need to either cut spending or raise their income. If neither is possible, which I highly doubt, there are other options.

To read about other options and more detail of payday loans, check out the Consumer’s Union fact sheet.

Just please, whatever you do, do not get a payday loan. Also remember, friends don’t let friends get payday loans.

Have you ever taken out a payday loan? How did you think the experience was? Did you learn any lessons about high interest debt?

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  • dale

    Yup, they’re a huge rip off, yet people use them again and again. I think they’re a lot like the people who use Refund Anticipation Loans at tax time. The APR is through the roof, but people don’t mind paying to get their refunds as soon as possible.

  • Eric

    Many people do not mind paying when they are in a crunch, but are often put into a much worse situation because of the payday loan.

    A payday loan is essentially a bridge loan for people who already have money problems. It is such a big problem for the military that laws have been explored to keep payday loan companies away from bases.

    If the government is protecting their own employees from payday loans, they should protect everyone.

    An APR cap should be put on all loans nationally at a rate that puts these people out of business. Legitimate banks charge far less (much lower than 10% today) for loans and are still profitable.

    If you need a personal loan, check out a credit union. They will be much more honest and have better terms.

  • dale

    “An APR cap should be put on all loans nationally at a rate that puts these people out of business. Legitimate banks charge far less (much lower than 10% today) for loans and are still profitable.”

    If you do that, then people with limited and/or shaky credit histories will not be able to obtain legitimate credit. It would however make the shylocks extremely happy!

    “If you need a personal loan, check out a credit union. They will be much more honest and have better terms.”

    But will they loan you $500? Or even $1,000? Part of the problem is that small loans are not profitable. It takes just as much time and effort to do a $25,000 loan as it does a $500 loan. Most commercial banks and credit unions want to put small loan requests into some type of revolving credit, typically a credit card. One of the reasons that payday lenders and finance companies exist is that they’ll make the small personal loan.

  • Eric

    I am not saying the ARP cap should be 10%. That would price many banks out of giving loans to risky clients. Something around 50%, which is still predatory in my eyes, would put the payday loan places out of business or at least make them stop being so terrible to people in trouble.

    For small loans like that I think the best place to go might be an online community loan service like Prosper.

    What would be best is if people were able to budget and control their spending so a $500 emergency loan is never needed.

  • Tyler

    “If you need a personal loan, check out a credit union. They will be much more honest and have better terms.”

    Their is a big problem with this statement! Credit unions offer payday loans under a different name. The APR is less, I agree. But what they fail to disclose is the participation fee that they charge, that if included in the APR would raise it to the same price if not more than a payday loan.
    Check your local credit union if you don’t believe me.

    Also to use the “APR” to describe a payday loan is not correct. A payday loan is until your next payday, not an entire year. To say that a payday loan APR is 300%, the payday loan would have to be for an entire year. THis is not allowed as far as I know in any states.

  • Eric

    Tyler, the rate needs to be on an APR basis to compare across loan types. Few people I know keep credit card balances over longer than a few months, but that rate is still calculated in an APR basis.

    To calculate interest on anything, you multiply by an APR factor. That is ARP*(Days of Loan/365). While the factor is lower than the ARP, it is still an important number to compare terms. No payday loan company will advertise the rate, but federal regulations require that the rate is disclosed on virtually all loans. Some banks use APY, which is calculated slightly differently, but APR is the standard.

  • Tyler

    The payday loan store that I live by charges $8 for a $100 loan for a week. Does this really sound that bad? Don’t you think the APR sounds a lot worse than it really is? That is my point, the APR makes it sound like they are charging you double what the loan amount is for. $8? Come on, you have to admit that doesn’t sound bad at all. A bank return check fee is at least $20, usually $30. Wouldn’t you like the option to take out a payday loan if you know it will avoid the return check fee?
    Also, why are you and everyone else so obsessed with closing down payday loan stores, when credit card companies offer cards that have credit lines of over $15,000. A payday loan is on average $200. Are people losing their house because of a payday loan? No. They are losing their house because of credit cards and bad home loans.

  • Eric

    You are right, $8 does not sound bad. But think about it. That is a rate of 8% per week. My car loan rate is less than 6% per year.

    Do you work at a payday loan place? Why keep defending them. 8% per week * 52 is 416% per year. If you roll it over, as many people do, that $100, which is really $92, costs much more than $8.

    If people are having trouble making payments they should cut spending, not increase borrowing.

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