I read an [1] article today in the Northern Colorado Business Report that discussed payday loans in great detail.  The article made some very interesting points and comparisons that I would like to share with you.

Payday loans are typically small, unsecured loans provided by lenders often located in strip malls or small retail outlets.  To obtain a payday loan, you first write a check out of your bank account to the payday lender for the amount you want to borrow plus a fee (often $50)   The lender holds the check for two weeks then cashes it on the assumption that you will receive a paycheck by then and have enough funds in the account pay off the loan. 

If you don’t have enough funds to cover the check in two weeks, however, the lender flips the old loan into a new loan with an additional fee plus interest.  According to the Center for Responsible Lending (quoted in NCBR), the average payday loan is flipped 8 times.  That means that for a $325 loan, the borrower must pay back $793.  Outrageous?    Maybe not, when compared to your bank.  Read on.

The article then considers the alternatives to payday loans for individuals lacking cash.  As a baseline for comparison, the APR (according to NCBR) on a $100 payday advance with a $15 fee would be 391%.  Compare that to these alternatives as per Business Report Research, quoted in NCBR:

- $100 credit card balance with $26 late fee = 678% APR

- $100 bounced check with $48 NSF/merchant fees = 1,251% APR

- $100 utility bill with $50 late/reconnect fees = 1,304% APR

Astonishing.  If you are short on funds, taking a payday loan may in fact be better than overdrawing your account or making a late payment on a bill.  In fact, [2] a recent study from the Center for Responsible Lending found that banks reap some $17.5 billion per year in fees from abusive overdraft lending practices!

  CSU professor Ronnie J. Philips is quoted in the NCBR article as saying “The only reason payday lending exists is because banks charge so much on overdrafts.”  With all this information at hand, it is possible to conclude that your bank is in fact worse than a payday lender!

NOTE: I am not advocating the use of payday loans, just sharing what the NCBR reported on.  If you find yourself in need of short term cash, there may be better alternatives available to you than payday loans.  [3] Email me if you have any questions or are in need of help and I will do what I can. 

For the full text of the NCBR article, please visit the Northern Colorado Business Report at [4] http://www.ncbr.com/article.asp?id=87520.