PayDay Loans: The Expensive Truth

If you think the interest rate on your credit card is high, how about one that is 400%?

That’s the rate on some payday loans these days. Typically controversial, payday loans are short-term, often high-interest-rate loans where cash-strapped consumers can make a payday pact with a lender just to get their hands on some quick cash.

Payday loans are on the rise, with 22,000 locations across the U.S., compared to 200 payday locations back in the early 1990’s. Altogether, it’s a $40 billion business, and both increasingly desperate consumers and skeptical federal regulators are taking notice.

The regulators seem to have the upper hand though. The Center for Responsible Lending says that a growing number of states, most recently Arizona and Ohio, have new laws in place to cap interest rates on pay day loans, to 36% and 28%, respectively -- more in line with the higher ceilings on credit card rates.

By and large, payday loans work like this. A consumer looking for quick money visits a payday loan center, post-dates a check, gives it to the lender and in return, receives some up-front cash. But it’s not a square deal, experts say. According to the Americans for Fairness in Lending, the typical borrower pays back $793 for a $325 loan, and APR’s on two-week payday loans range from 390 – 780%.

Critics say that payday loans amount to a particularly potent form of predatory lending, which can lead to a sustained cycle of debt for debt-burdened consumers who can least afford it.

"These two citizens’ ballots (in Arizona and Ohio) are really a mandate for cracking down on payday lending throughout the nation," said Policy Associate for the Center for Responsible Lending, Uriah King, shortly after the laws went into effect in November, 2008. "You can get no clearer message than a huge majority of voters rejecting 400 percent interest loans. A reasonable two-digit cap is sensible, fair, and it works to keep bad apples out of the consumer lending arena.”

So that said, don’t walk but run from payday loan operators. The current economy might be brutal, but it’s not bad enough that consumers should have to resort to such tactics to get through the week.

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