"Loan-Sharking" equates to usury, which is charging interest above an established legal rate. "Pay Advance", "Check Advance", "Deferred Deposit", "Payday Loan", or any other label like it is lower than loan-sharking. It is a legal, multi-billion dollar industry that you do not want to get lured into.
As a young military in Korea years ago, I remember none of us had much money. Gambling and "other pastimes" took the little we had before month's end-- but there were always the "friendly", black-market loan sharks offering 50% interest loans very close by. Guess who was also 5 feet away from the pay station on pay day... the Korean version of Don Corleone, of course.
It has not changed much over the years or location or title. The Payday or cash advance lender still preys on the financially struggling individual. The pay back still revolves around payday. The rates are still exorbitant. What has changed is that it is now legal, the "APR" exceeds 350%, and the client is not restricted to the military. The prey are now thousands of struggling, hard working folks who are having a tough time making it to the end of the month. Many toil on very low paying jobs, have serious medical debt, gambling addictions or worse. But they all are collecting pay stubs and maintain a checking account.
So the hard working, debt-burdened consumer sees a warm, friendly, office with an innocent name such as Pay Advance. "Is this an opportunity or what?" Sure it is... for the lender. Here's a scenario from real life copied from e-mail sent to me.
"I owe nine check advance companies (companies that will let you write a check for cash with a fee included) a total of $3000. I also have approximately 15 checks I have bounced as a result of trying to pay off these check advance companies. The total amount due of all the checks with fees is approximately $1500. I have people calling me all the time and they are also calling my boss at work. They tell me I can not make partial payments on my checks and almost all of them want their money within ten days or they will turn it over to the county courts office."
Not An Isolated Case
Check advance operations are springing up across the nation and may be one of the fastest growing industries we have. The former owners of Blockbuster Videos sold their successful corporation to reinvest in their first pay advance operation. That was 3 years ago. There are now 1500 offices and that is just one conglomerate. Business growth like this does not occur without phenomenal profit potential. I would consider a 200%, 300%, or 400% APR a sizable potential profit, wouldn't you?
But another e-mail referred to an article in a Memphis newspaper. The author of the article queried one of the owners/managers of a check advance business and pointed out that high fees [$20 for 7 days on $300] worked out to be a 360% APR. The payday loan owner said, "It did not matter what the yearly rate was if you only needed the loan for a short period of time."
The owner is right- or is he? We have already addressed the fact that the tendency is to use such a system again and again. If I pay a loan back and then take out another, and then another, and then another, I bet I can make a strong case for 360% APR.
But it is not an APR.
It is a fee. The Glossary of Political Economy Terms from Auburn University defines Interest rate as "The price(s) of obtaining the temporary use of money that one borrows from someone else who actually owns it, normally expressed as a percentage of the amount borrowed per year." A fee, on the other hand, is "a charge for services rendered".
Therefore, it is not an "excessive APR" because it's a fee and any comparison to usury is comparing apples and oranges. So how could it possibly be loan-sharking? DUH. What is wrong with me. But here is another little tidbit. Collectors cannot take partial payment for advance check pay back because advance pay is not considered a loan. Advance check operations fall under non-sufficient fund (NSF) laws, which means they can demand the local district attorney's office to act as their collection agency.
No wonder these operations are flourishing. They have it all going for them.
Authoritative Words From Others.
The Consumer Federation of America calls it legal loan sharking:
"The Consumer Federation of America describes them [Payday Loans] best: 'Payday loans are single-payment, short-term loans based on personal checks held for future deposit or on electronic access to personal checking accounts. In a typical transaction, a consumer writes a check for $117.65 to borrow $100 cash, with the total amount due by next payday or in up to 14 days. The $17.65 finance charge computes to a 459% annual percentage rate.'"
And the very respected American Association of Retired Persons has this to say:
"typically involve small amounts of money lent for a short period at very high interest rates. The customer -- usually a low-income individual who is excluded from mainstream lending sources.... Many borrowers end up renewing the loan over and over again because they cannot pay off the loan and still have insufficient funds to cover the check when the loan period ends. In the example above [charge $15 for a $100 loan for two weeks], they would pay another $15 each time they extended the loan, receiving no additional money in return. While the effective annual interest rate depends on the fee and how many times the borrower pays an additional fee to renew the loan, estimated annual percentage rates around the country range from 700% to 2,000%."
Alternatives to Payday Loans
FTC and Consumer Federation of America (among others) suggest some of these alternatives to Payday Loans:
1. Make a realistic budget, and figure your monthly and daily expenditures.
a. Avoid unnecessary purchases - even small daily items.
b. Build some savings - even small deposits can help - to avoid borrowing for emergencies, unexpected expenses or other items.
c. Putting the amount of the fee that would be paid on a typical $300 payday loan in a savings account for six months can give you a buffer against financial emergencies.
2. Find out if you have, or can get, overdraft protection on your checking account. If you are regularly using most or all of the funds in your account and if you make a mistake in your checking (or savings) account ledger or records, overdraft protection can help protect you from further credit problems. Find out the terms of overdraft protection.
3. If you need help working out a debt repayment plan with creditors or developing a budget, contact your local consumer credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers. These services are available at little or no cost. Also, check with your employer, credit union or housing authority for no- or low-cost credit counseling programs.
4. If you decide you must use a payday loan, borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the next payday.
5. Ask your creditors for more time to pay your bills. Find out what they will charge for that service - as a late charge, an additional finance charge or a higher interest rate.
6. Shop for the lowest cost credit available from cash advances on credit cards, small loans from a credit union or a small loan company.
7. Consider asking your employer for an advance or turning to friends or family when an emergency arises. Put in writing a good faith agreement to pay them back by a certain date.
8. Some community-based organizations may make small business loans to individuals.
9. Ask for more time to pay utility bills.
Breaking Out of the Downward Spiral
Please understand, I am not advocating not paying your just debt. But the following are ideas presented to me by others who have been caught up in the payday loan spider's web. They are offered to your for your prudent decisions.
1. "Came to a point that I could not pay them. I called them and told them. They asked what I could send them and placed an amount. One even told me if I could not make a payment, just to call."
2. "Criminal bad-check laws do not usually include post-dated checks. Furthermore these can be discharged in bankruptcy. At the time you write these checks, the lender knows they are bad because they are post dated. They therefore are not generally considered "bad checks" but "bad debts", and ordinary debt laws apply. So, at least from a legal point of view, skipping out on the payday lender is no worse than skipping out on any other lender."
3. "I would close the checking account. Open a new one and then start paying them with money orders. This might be a temporary option so that you can get caught up on your mortgage. I would hate for you to get even further behind just to pay the Check for Cash people."
4. "Stop payment on the outstanding checks they already have prior to closing the account to de-fuse the possibility of getting stuck in the ChexSystem mess."
5. "I was once caught up in the payday advance situation. What I ended up putting a stop payment on the checks (2) and then making payment arrangements with the company. Even though they weren't too happy, at least I was making a dent in the debt and not incurring any more charges. Although one of the places wrote it off to a collection company, they still accepted getting $25 a month each. Then I could use my paychecks to pay my bills, instead of the fees they charge you. While it may not be the perfect solution, at least you will break the payday cycle. Hope this helps. Also when I made the payments I used money orders."
6. "Check the laws for your state regarding the Check for Cash places. I know in Florida you can contact the lender and tell them you will not be able to pay the check. They give you 90 days to pay the check but you must enter into a debt counseling class. Maybe your state has a law like this."
7. "I wrote to the payday companies, certified mail (even if they are in your hometown, I'd do this because it legally proves you contacted them). I told them that due to unforeseen circumstances, I could no longer pay them. I offered a payment plan that was more than fair, even including their interest fees. A few of them refused, but they ended up having to accept what I could pay, and those that refused ended up not even getting the interest."
8. "Stop paying them. I believe that all states now have laws prohibiting them from prosecuting you. If you've written the letter telling them they can't pay, and then stop payment on the check, you will have protected yourself somewhat if they chose to go after a civil judgment (they won't). Then, make payments YOU can afford...DO NOT let them set the terms. Once you get your mortgage, electric and phone caught up, increase the payments to the payday loan people significantly until you can pay them off, but don't increase them to the point you can't pay them."
9. "The best thing to do is to contact the payday lender as soon as you find out that you cannot pay them (due to your employer changing paydays, or other reasons). IT really helps if you can provide documentation or a contact (such as your boss, or payroll company), to back up your story. Most payday lenders are flexible, and would rather get paid late, then not at all. Again, think of yourself as a lender, and your brother-in-law that owed you money came to you and explained that his baby unexpectedly got sick. You are more inclined to believe him if he shows you bill from the doctor with a date on it that is after you loaned him the money, right?"
10. "Section 3-104(2)(b) of the UCC, defines a check as 'a draft drawn on a bank and payable on demand.' A postdated check, since it is not payable on demand, does not satisfy this demand. Consequently, it has generally been held by most states that the giving of a post-dated check does not constitute a present fraud nor is it within the scope of the bad check laws."
What can we as a society do?
Consumer Federation of America offers major insight to answer this question in the following statement.
"Failing an outright ban on cash advance loans, this type of loan should be explicitly regulated through state small loan laws requiring licensing or registration with state banking officials. Disclosures must comply with the federal Truth in Lending Act."
1. There should be an absolute cap on effective annual interest rates. States should limit the size of these loans, set a minimum term that realistically permits the loan to be repaid, require written contracts, forbid multiple loans and roll-over of cash advances into new loans, and prohibit lenders from threatening borrowers with bad check laws if they fall behind on payments.
2. Lenders should not be permitted to bring criminal prosecution for failure to pay cash advance loans on checks and these loans should be treated as unsecured debt for purposes of bankruptcy. States should collect industry-wide data to monitor the business.
3. The federal government should close any loopholes that permit national banks to make payday loans in any state that prohibits state check cashiers or state chartered financial institutions from making this type of loan. The Comptroller should require banks to comply with the consumer protections in the states where they do business.