Payday loans can get out of hand

  • Payday loans are increasingly scrutinized
  • The fees may seem low% 2C but consumers can fall into% 22 debt traps% 22
  • 19 million people use payday loans every year in the United States

For someone who can’t pay a cell phone bill or the rent, it might seem perfectly reasonable to pay an extra $ 42 to get a $ 300 advance on a two-week salary in Michigan.

After all, you would be able to pay the bills, keep your service, and avoid additional late fees.

There is no doubt that borrowers can afford to pay $ 15 or $ 20 in fees for every $ 100 borrowed for some payday loans.

But the real question is, can they really afford to pay off payday loans? Find $ 300 or $ 500 in just two weeks? Or even in a month? This is no small feat, especially as regulators are examining whether borrowers can also afford to pay off mortgages and student loans.

Payday loans are coming under closer scrutiny. Richard Cordray, director of the Federal Bureau of Financial Consumer Protection, noted in a speech in February that the fees may seem low for quick cash, but financially troubled consumers could fall into the debt trap if the fees are piling up and consumers must borrow again to avoid defaulting and continue to make ends meet.

About 19 million Americans use payday loans each year, according to the Community Financial Services Association of America, a business group.

Some services, such as Check ‘n Go, have online calculators that can make loans feasible. Plug in an amount of $ 300 to calculate the reimbursement in Michigan and you will see that there is a finance charge of $ 42.45. You would repay $ 342.45 and the annualized interest rate would be 368.91%.

Reimbursement would vary considerably from state to state. In Texas, this $ 300 payday loan would have finance charges of $ 76.15; you would reimburse $ 376.15 and the APR would be 661.78%.

But the fine print says this is based on a 14 day loan term.

Frankly, this is where the mess begins of grabbing money here to pay money there.

“It is highly unrealistic for borrowers to think that they will repay the loan on their next payday,” according to Pew’s latest “Payday Lending in America” ​​report.

Alex Horowitz, research director for Pew Charitable Trusts in Washington, DC, argues that many people end up trapped in a payday loan cycle that lasts more than five months or more.

About 27% of those polled in the Pew Report said that a payday lender making a withdrawal from their bank account caused an overdraft, according to the Pew report.

Lenders can automatically withdraw payments from borrowers’ bank accounts.

Only 14% of those polled in the Pew Report said they could afford to pay more than $ 400 for their payday loan debt in a month, the report notes.

Amy Cantu, spokesperson for the Community Financial Services Association of America, took issue with several aspects of the Pew report, noting that the typical customer uses the product for weeks or months, not years. A consumer can use the product seven times during the year for a short period of time, and not all uses are consecutive, she said.

But do consumers have other options? Maybe, but they’re not exactly cheap or obvious.

The Communicating Arts Credit Union of Detroit offers a MyPayToday product that offers a loan of $ 500 at a time, but the consumer has two months to pay it off. The annual fee is $ 70, which could result in significant savings for repeat fees if a person borrowed this way more than a few times a year. There is also an 18% interest rate.

Fifth Third Bank offers a short-term early access product that was launched in 2012 and may be available to many customers with certain checking accounts in its markets, including Ohio, Kentucky, Michigan, Illinois and Florida.

Even the bank’s information recognizes that the product is “an expensive form of credit”. A $ 300 advance with the Early Access product would cost $ 30, or an annualized percentage rate of 120%.

But the quick loan is automatically repaid with the next direct deposit of a paycheck into that account.

And yes, you could rack up overdraft fees if you’re not careful. Fifth Third said it would not charge an overdraft fee on an automatic payment to cover the early access loan, but subsequent bad checks would be subject to an overdraft fee.

“Our point of view is that this is for emergencies,” said Jack Riley, spokesperson for Fifth Third Bank in eastern Michigan.

The product, fortunately for parents, is not available for the fifth third student checking account.

As regulators debate this one, consumers who are tempted to take out a payday loan must honestly answer: How fast will I really be able to repay this loan?

Average borrowers nationwide are left in debt for five months, paying $ 520 in finance charges on loans averaging $ 375, according to the Pew report.

Will the payday loan get you through a short tough time? Or are you going to be in debt much longer than expected?

Other things to consider about short-term loans:

All payday borrowers must have a source of income and a checking account. Most payday borrowers are employed, but experts say it’s possible for someone to get a payday loan with a check for benefits, like Social Security.

One in six payday loan borrowers have used a tax refund to eliminate payday loan debt, according to a report from Pew Charitable Trusts.

There are a few options to consider in lieu of a payday loan – a small loan from a family member or friend; a small loan from a bank or credit union; request a salary advance from an employer and ask the creditor for more time to pay the bills.

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