Would you take out a loan that has an annual percentage rate of 391 percent?  Yes, I know that sounds absolutely crazy, but millions of Americans do it every single year.  The typical payday loan requires borrowers to pay about 15 dollars for every $100 that they borrow for two weeks.  That comes out to a yearly rate of about 391 percent.  And the payday loan companies know exactly who to target.  They have set up thousands of shops in the poorest communities all over the nation over the last several decades.  Each year, approximately 12 million Americans take out payday loans and they pay approximately 7.4 billion dollars in interest and fees on those loans

 

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From The Economic Collapse Blog:

Sadly, once you get hooked on payday loans they are very hard to stop.  In fact, one study found that only 13 percent of payday borrowers get two loans or less per year.  All other borrowers take out more loans than that.  In fact, more than a third of all payday borrowers take out between 11 and 19 loans during the course of a single year.  And as was mentioned earlier, the interest rates on these loans are beyond exorbitant.  Payday loans are estimated to be about  20 times more expensive than bank loans, with annual interest rates that are sometimes as high as 500 percentThe payday loan companies circle the poor like vultures, because they know that the poor are the only ones desperate enough to agree to such terms.  This is why we need to shut them down.  The payday loan companies are making billions preying on the misery of the poor and it needs to be stopped.

And it just isn’t small, disreputable banks that are involved in these practices.  The truth is that some of the largest banks in America are now making payday loans…

Some, including U.S. Bank, Fifth Third Bank and Wells Fargo, offer payday loans under names such as Ready Advance, Fast Loan and Early Access, according to the Center for Responsible Lending (CRL). They can carry interest rates averaging between 225 and 300 percent, CRL said.

Others major banks not making such loans directly, but instead they are investing millions of dollars in the companies that do make the loans.  Bank of New York Mellon Corp., JPMorgan Chase and Bank of America are just some of the major banks that have invested large amounts of money in the payday loan industry.

These financial institutions are making billions of dollars by exploiting the people in our society that are the most vulnerable.  As I showed the other day, the bottom 90 percent of America is systematically getting poorer, and many Americans in desperate financial situations have found  the easy cash provided by the payday loan companies to be irresistible.  The following are some statistics about payday loans from a recent Pew Research study...

-Fifty-eight percent of payday loan borrowers have trouble meeting monthly expenses at least half the time. These borrowers are dealing with persistent cash shortfalls rather than temporary emergencies.

-Only 14 percent of borrowers say they can afford to repay an average payday loan out of their monthly budgets.

-Seventy-eight percent of borrowers rely on information from lenders—who sell these loans as a safe, two-week product—when choosing to borrow money. This reliance reinforces the perception that payday loans are unlike other forms of credit because they will not create ongoing debt. Yet the stated price tag for a two-week, $375 loan bears little resemblance to the actual $520 cost over the five months of debt that the average user experiences.

-While payday loans are often presented as an alternative to overdrafting on a checking account, a majority of borrowers end up paying fees for both.

-Some borrowers ultimately turn to the same options they could have used instead of payday loans to finally pay off the loans. Forty-one percent need an outside cash infusion to eliminate payday loan debt– including getting help from friends or family, selling or pawning personal possessions, taking out another type of loan, or using a tax refund.

-By almost a three-to-one margin, borrowers favor more regulation of payday loans. A majority of borrowers say the loans both take advantage of them and that they provide relief. Despite feeling conflicted about their experiences, borrowers want to change how payday loans work.

But those statistics don’t really convey the real world consequences that these predatory loans have.  Many Americans have lost everything that they had after they turned to payday loans.  In fact, it is estimated that at least 50,000 Americans a year go bankrupt due to payday loans.

A recent NBC News article profiled Raymond Chaney, a 66-year-old military veteran that had his life totally destroyed by these predators…

For Raymond Chaney, taking out a payday loan was like hiring a taxi to drive across the country. He ended up broke — and stranded.

The 66-year-old veteran from Boise lives off of Social Security benefits, but borrowed from an Internet payday lender last November after his car broke down and didn’t have the $400 for repairs. When the 14-day loan came due, he couldn’t pay, so he renewed it several times.

Within months, the cash flow nightmare spun out of control. Chaney ended up taking out multiple loans from multiple sites, trying to to stave off bank overdraft fees and pay his rent. By February, payday lenders — who had direct access to his checking account as part of the loan terms — took every cent of his Social Security payment, and he was kicked out of his apartment. He had borrowed nearly $3,000 and owed $12,000.

“I’m not dumb, but I did a dumb thing,” said Chaney, who is now homeless, living in a rescue mission in Boise.

Is there anyone out there that still wants to argue that we should not shut these predators down?

Sadly, many Americans in poor communities have very few alternatives to the payday loan companies.  In recent years, the large banking chains have been systematically closing down branches in poor neighborhoods while expanding in wealthy neighborhoods at the same time.  Since the Federal Reserve is paying banks not to lend money, it doesn’t make a lot of sense for them to make high-risk loans to poor Americans who may not be able to pay them back.  And recent regulations passed by Congress have made it not very profitable to offer checking accounts to poor people.  In many poor communities all over the country, it has now gotten to the point where it is becoming extremely difficult to find a bank branch anywhere.

So payday loan companies have been more than happy to fill the void.

But don’t look down on those that have taken out payday loans.  The truth is that almost all of us have willingly allowed ourselves to become enslaved to the system at one point or another.

For example, in a previous article entitled “Money Is A Form Of Social Control And Most Americans Are Debt Slaves“, I pointed out the utter foolishness of constantly carrying a balance on a credit card.  In that article, I included a great explanation from a former Goldman Sachs banker about how incredibly crippling credit card debt can be…

On the debt side of things, how much does your credit card company earn if you carry just an average of a $5,000 credit card balance, paying, say, 22% annual interest rate (compounding monthly) for the next 10 years?

In your mind you owe a balance of only $5,000, which is not a huge amount, especially for someone gainfully employed.  After all, $5,000 is just a quick Disney trip, or a moderately priced ski-trip, or that week in Hawaii.  You think to yourself, “how bad could it be?”

The answer, including the cost of monthly compounding, is $44,235, or about 9 times what it appears to cost you at face value.

This is why one of the top things that I recommend for getting prepared for the economic crisis that is coming is to get out of debt.

You do not want to be enslaved to financial predators when everything starts falling apart all around you.

Phil banner

  1. I have no issue with Payday lenders as long as their customers fully understand the terms of the agreement and I place that burden on the Payday lenders being that they are the professionals in this transaction.  Seems to me it is a matter of demand being met by the marketplace.  No one is forcing anyone to buy their product.

    • Some states don’t feel the same as you. From a capitalist perspective what you say is correct. From the perspective of the state, there have been a crack down on this type of business the last couple years making it more difficult for them to reap the windfall profits from the increasing masses in a financial dilemma.
      Each state has legislated different rules. I don’t suspect the “industry” to survive well when they’ve been legislated to loan like banks do.
      The big push in this sector was cash for gold as part of their menu of services.
      I know this because I helped test leading software for the check ‘n cash business model.

    • “Seems to me it is a matter of demand being met by the marketplace.  No one is forcing anyone to buy their product.”
       
      One COULD say the very same thing about drug dealers and prostitutes, yet one would be hard-pressed to give good reasons for the patronage of either of these free-market offerings; particularly not when society is then left to sweep up the human debris that often results.  
       
      My question in all this would be, “Are those who take out these loans even capable of understanding their true ramifications?”.  I would imagine that some are but that many others are not.
       

  2. the perfect scam. printing money to infinity, but doing it to launder garbage loans off bank balance sheets and to capitalize them – and mainly to keep interest rates low. BUT.. the money isn’t lent to the public or businesses at this low rate.
     
    No, the banks instead start up these extortion racket places and fine yet another form of predatory lending.
     
    So the average joe has less access to capital. People who buy metals are getting their asses handed to them, and the recovery is nowhere in sight. We need firing squads and summary field trials.

  3. you know, many years ago when i first saw these ‘payday’ loan places spring up i thought to myself how awful it was & they shouldn’t even be allowed (kind of like all the casinos that have come to dominate so many American cities) .   when i was a kid, there was no such thing as ‘payday loan’ places & as for casinos….. well, if you wanted to gamble your money away, it was a get-together at a friend’s house for cards on a friday night.    America is now nothing but a ‘gotcha’ society, scams at every turn of the road to drain what little is in our wallets to corporations big & small.    we used to work for a living to earn money, save that money & earn interest on that money i a bank .    now, everyone is jobless or homeless & in debt to banks, everyone from the elderly to the young adults.   

  4. In the fashion of my dearest economist, Frederic Bastiat … we can readily see an image before us, but let’s endeavor to uncover what isn’t seen upon this canvas … shall we?
     
    I have very little tolerance for these ‘bleeding heart’ stories, because they go far to obfuscate the true culprits at the core of the quandary common folks suffer under. The plain fact is that governments MAKE poverty by making worthless Plantation Scrip ‘legal tender’. It’s a well settled fact that wages (in neither nominal nor purchase power terms) in the banknote scheme do not keep pace with the currency’s depreciation and commensurate cost of living increases. Worse, the ‘progressive’ tax rates are seldom adjusted for this phenomenon, immorallt draging ever poorer folks into higher ‘brackets’ as they’re ‘blessed’ with woefully insufficient ‘raises’ (not so surprisingly, often … mandated … by government).
     
    Were it not for this insideous trap laid out by governments to provide monopoly industrialists with subsistance labor, market forces in competition for workers would drive wages to their highest economic level in sync with overall demand and inter-market productivity norms. In that environment these loan-sharks would predominantly draw scorn and rejection, rather than desperate submission.

  5. Nothing new under the sun.
    Good Times.
    Any time you meet a payment.
    Good Times.
    Any time you need a friend.
    Good Times.
    Any time you’re out from under.

    Not getting hastled, not getting hustled.
    Keepin’ your head above water,
    Making a wave when you can.

    Temporary lay offs.
    Good Times.
    Easy credit rip offs.
    Good Times.
    Scratchin’ and surviving.
    Good Times.
    Hangin in a chow line
    Good Times.
    Ain’t we lucky we got ‘em

  6. Let them borrow the money from organized crime instead.  Hey wait.  It is organized crime.  Never mind then.   There is no shortage of fools that Snyder is an advocate for.  That’s for sure.  He must be looking at a completely different set of downtrodden misfits than what I’m looking at.  

  7. Sure this is capitalism at work but it is also preying on an undereducated part of our society, many of these people don’t understand how fast interest can pile up. I can see a cap on interest rates to prevent people from losing to much, and if someone is on social security it is already illegal to garnish them if they are below the poverty level. But that isn’t stopping these crooks in the banks from taking every last penny they can from the poor and middle class.

    • Agree, I remember one of my first jobs… The day before payday one of my co-workers asked for $10 to fill up his car and promised me he’d get back to me with $15 tomorrow.  I gave him the $10 and told him to just get me back with $10… but I know if I would have just taken the $15 he still would have thought I’d really helped him out.  
       
      These make it too easy to spend rather than save, or if not save at least ration dollars.  It is a bad recipe having so many of these places “helping people out” and nobody teaching how one might better stretch a dollar.

  8. It’s financial predation, no doubt. Nobody is “putting a gun” to anyone’s head forcing them to do business with these places, but in fairness the cold, hard consequences of dealing with “businesses” such as these are generally obfuscated or not elaborated upon (excepting sites like this one, of course). In other eras, usurers were dealt with harshly, once their “host” community had had enough of practices like this. Today, the usurers control most institutions in our society.

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