19 Million Americans Did This Last Year

NEW YORK (MainStreet) — Call payday loans the Vlad the Defiler of personal finance.

The strong warning from consumer protection advocates is that even sniffing one puts you on the fast track to financial ruin.

But tell us this: what do you do when that molar cracks, the pain is excruciating and your dentist long ago put you on a cash and carry basis? You have no accessible credit card balances. Your relatives hang up on you when you call. No savings.

Or maybe your car gets towed for unpaid parking tickets, and now you need $500 to bail it out - or you will lose your job, because your boss put you on warning last week about missed days.

What do you do?

What 19 million Americans did last year was take out a payday loan, said Jamie Fulmer, a senior vice president at Advance America, one of the nation's largest payday loan companies with operations in 29 states. He added that some 96% of Advance America customers rate their customer experience good to excellent.

Fueling this is that a lot of short-term credit availability has gone poof in the past decade. Traditional banks have cancelled credit cards, sometimes for scant reason. They have erased credit lines.

Also know that to a degree a generational shift is fueling the rise of payday lending, according to Jim Wells, president, Wellspring Consulting International in Fort Lauderdale, Fla.

"Millennials and Gen Y are gravitating towards using financial services on a pragmatic, transactional basis versus traditional, deposit-based banking," he said. "This pertains to the use of payday loans."

Wells added: "critics brand these non-traditional products 'predatory,' but in most states the rates and terms are regulated. All are published conspicuously on the walls of the outlets."

For sure, Wells has at least one thing dead on right. The critics portray payday lenders as 21-century blood suckers.

What's the reality?

Payday loans are expensive. Fulmer said that an average loan is $355, and charges are $15 per $100 for the typical 18 day duration. So make the cost $53, and over the course of the year, the APR melts the calculator (it's a couple hundred percent).

To get the loan, you need a verifiable job and you need a checking account. A plus for many borrowers: "We don't do a credit check," said Fulmer.

The borrower signs some papers, then fills out a post-dated check for the full amount and he walks out with the cash. "The default rate is single digit," said Amy Cantu, communications director for the Community Financial Services Association of America, a payday lender trade group.

But aren't those fees high? Here's the fact: payday loans are made to folks who generally don't have other alternatives and certainly they don't have better ones. Then, too, banks hit their customers with huge fees - often $30 and higher for a bounced check, an amount probably matched by a penalty imposed by the check recipient. Do the math. "A payday loan can sometimes be cheaper for our customers," said Fulmer.

A few states - Arizona and Ohio among them -- ban payday loans outright and another ten have interest caps that effectively eliminate payday loans. In New York, for instance, charging over 25% APR could lead to a usury charge and imprisonment on a felony.

But laws don't end need, said Fulmer, who suggested that in states without payday lenders borrowers in a bind turn to what he delicately called "unregulated lenders." That can be offshore lenders, a few Native American operations, and of course it also can be organized crime which long has made big money taking on loans others refuse. All charge substantially more than the regulated payday lenders - the classic Mafia loan is "six for five," meaning you borrow $50 today, on payday you owe $60, which of course is over 1000% APR.

The jackpot question is this, however: is payday lending addictive? Fullmer scoffs. According to him the most common customer seen at Advance America is one and don--he takes out a onetime loan to handle an emergency and he's never seen again. The second most common customer: twice and done.

Bottomline: Payday loans suck. Even at the regulated lenders, the cost of the money is high. But what's worse: that pain in a molar that has you on your knees...or paying maybe $50 in short-term interest so a dentist will pull the bad boy?

--Written by Robert McGarvey for MainStreet

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