Beware of Payday Lending

You know your finances aren't in the shape you want them to be. You don't have a stash of emergency funds socked away. You're living from paycheck to paycheck. but then your car dies. You need a few hundred dollars, fast, and you don't have it.

Enter the payday lender. In increasing numbers in the United States, these lenders are advancing money to borrowers in just such a dilemma -- and they're charging several arms and legs in the process.

According to the Center for Responsible Lending (CRL), payday lending -- only one of many kinds of "predatory lending" -- sucks $3.4 billion a year out of consumers and communities. Asserting that "the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need," the CRL cites data showing that 91% of payday lending goes to borrowers who take out five or more loans per year. Only 1% of such loans go to one-time borrowers with emergencies.

A CRL example illustrates the dynamic: "A borrower writes a $300 check dated two weeks in the future to a payday loan company and takes home $255 in cash after the $45 in fees charged ($15 per $100 borrowed). In two weeks, the loan is due in full, but most borrowers cannot afford to pay the loan back and still make it to the next payday." To avoid defaulting, they end up repeatedly paying $45 every two weeks -- all for a $255 advance.

Other characteristics of predatory payday lenders include the lack of an installment-payment option to help the borrower pay down debt, an annual percentage rate of several hundred percent (yes, you read that right), and no evaluation of the borrower's financial condition and ability to repay.

Fortunately, there's some good news for people in a bind. Some credit unions have stepped up to offer a more consumer-friendly alternative in the form of "salary advance loan" programs. Members can borrow up to $250 (later $500, if they exhibit good repayment habits) for a month, paying no more than an annual interest rate of 18%, which amounts to about $3 in a month. Generally, there's also an annual fee of around $35 to use the program.

Whether you're living from paycheck to paycheck or are looking to buy a $400,000 house, don't be a sucker for predatory lenders. Get informed, and you'll end up with much more bang for your bucks.

Learn much more about the credit card industry and how to manage debt effectively in our Credit Center (we even have some Motley Fool credit cards you might want to consider; you can read about them there). And read about all things credit-related on our Consumer Credit/Credit Cards discussion board.

You may also find these articles interesting:

Selena Maranjian is a longtime Fool contributor.


Read/Post Comments (0) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 490150, ~/Articles/ArticleHandler.aspx, 4/16/2014 3:50:31 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement