Those of us who aren’t living paycheck to paycheck or who don’t have three or four maxed out credit cards probably don’t know much about payday loans.
Payday loans are short term loans run at high interest rates to be paid back when the borrower gets his or her next paycheck. Maybe you saw the recently canceled CW show “Easy Money,” about a family-run payday loan business (no, nevermind, no one saw that. That’s why it only ran half a season.) Or maybe you’ve been following the news out of Virginia, Colorado, and the U.K. about attempts to reform scam interest rates, mostly for online payday loan sites.
A simple Google search for "payday loans" will tell you what’s up. Take a look at the Top Three Sponsored Links, for example. CashAdvanceSpecialists.com (specializing in screwing you over, I would assume) advertises, "Half Priced! Fast. Easy. Secure. Bad Credit Ok. $100 to $1500." "Bad Credit Ok"? Well, of course it is, as most payday loans are given to those whose credit is so bad they can’t get a bank loan or another credit card.
As the Virginia online newspaper The Hook put it earlier this year, quoting State Senator Roscoe Reynolds who has proposed banning payday loans in the state altogether, "people who think payday lending is mainly an urban problem need to think again. On a per capita basis, there are more payday lenders in Southside and Southwest Virginia than anywhere else in their state, he says, sucking money out of those already economically hurting areas."
Most payday loan scams (especially for online sites) take the place of additional (and exorbitant) interest rates hidden in contractual fine print. Lisa Bachelor, in a recent article for the Guardian, recounted how she talked to an online saleswoman for the popular payday loan site, Pounds Till Payday. "We were told that for £100 borrowed the company would charge £29.98. When we asked if there were any late payment charges if we did not have the funds to pay within 31 days, we were told that a £59 charge would be added to the bill, which is not advertised anywhere on the website."
Concern in the U.K. about payday loans has led to calls from Parliamentary officials and activist groups to ban them outright. Damon Gibbons, chairman of Debt on Our Doorstep, for example, is quoted as saying, "We would suggest that not bothering to run any credit checks or verify income constitutes irresponsible lending and would like the Office of Fair Trading to look at whether these companies should have their credit licenses revoked."
Even when there’s no scam involved, payday loans can quickly get out of hand, as Barry Yeoman discussed back in 2006 in AARP magazine, giving us the story of Sandra Matthis, who was on disability after a heart attack. One payday loan to cover an overdue phone bill quickly turned into another payday loan when her ex-husband was late with his alimony payment. "Then she went to a third company and a fourth. ‘I kept digging deeper every month,’ she said. ‘By the time I paid off one loan and the interest, I had nothing left.’ And she wasn’t alone. During her monthly trips to the various lenders, Sandra started seeing the same faces over and over again: people trapped in debt cycles similar to hers."
Payday loans are still legal in 37 states and further regulation has been slow to come. Considering our credit crunch and current economic situation–which has made banks extra cautious in their lending practices–and the peculiarly American love of buying things we can’t afford more and more people are sure to end up in trouble with payday loans. Don’t let it be you.