“Get Cash Now.”
“Quick Cash Here.”
Turn the dial to most urban radio stations and ads touting payday loans play regularly between morning talk and the evening drive.
Payday loans, or quick cash advances meant to assist borrowers between paychecks or in financial emergencies, have some politicians and consumer advocacy groups outraged over spiraling interest rates, and a fee structure they claim ensnare borrowers in a cycle of debt. Lawmakers on Capitol Hill are wrestling two key pieces of legislation aimed at establishing increased federal oversight of the industry.
Borrowers can apply for the loans, which in most states are capped at $300, in return for providing minimum information including name, address, and access to the borrower’s checking account. To receive the advance, a post-dated check for the loan amount or an automated clearing house (ACH) debit authorization must be submitted. In short, the purchase on the card will be deducted or the check will be cashed if the loan is not repaid in two weeks.
Coupled with an interest rate of about 390% or $15 to $22 per $100 advanced, it’s easy for consumers to find themselves in trouble, industry critics say. “The average payday loan customer takes out nine loans a year,” says Jean Ann Fox, director of financial services, at the Consumer Federation of America.
“There’s triple-digit interest for a short-term loan – two weeks — and it’s all due in a balloon payment,” adds Jennifer Johnson, senior legal counsel at the Center for Responsible Lending, a consumer advocacy group. Some lenders maintain that the 390% interest rate is misleading, arguing that opponents are assessing an annual percentage rate on an extremely short-term loan, says Willi Green, director of development and community outreach at Advance America, the nation’s largest payday lender. A 30% APR on a $100 loan for a period of 14 days would generate pennies on the dollar in revenue, a move that would make the industry unprofitable.