published Wednesday, November 30th, 2011

Personal Finance: Payday loan vultures circle over festivities

By Chris Hopkins

The holidays can be especially stressful for those on a tight budget. For someone living check to check, it is tempting to consider borrowing to finance a few gifts or to cover additional expenses. Many of us think of credit cards as the obvious solution, as long as we pay off the balance immediately.

But a certain segment of the working population without access to retail credit will be enticed to consider a pernicious alternative: payday loans.

Sometimes referred to as check cashing services or cash advance stores, payday lenders provide phenomenally expensive short-term loans. There are an estimated 20,000 loan stores in the United States, plus a growing number of online operations competing for the attention of the less sophisticated and most vulnerable members of the working poor. According to an industry analyst, payday lenders made over $40 billion in loans and reaped $7.4 billion in revenue last year.

The Dodd-Frank

financial reform mandated several new regulations relating to credit cards, but notably failed to curtail the usurious practices of the check-cashing industry. Seventeen states (including Georgia) have outlawed these businesses altogether, but regrettably Tennessee is not one of them.

Tennessee and several other states have constrained the most abusive practices of these entities by restricting the number of loans that can be made to an individual, capping the maximum loan amount, and limiting the effective interest rate (albeit at still penury-inducing levels).

Remarkably, at least 30 of these lenders are owned by Indian tribes and are therefore exempt from state laws regulating the industry.

The folly of a payday loan can be seen in the following typical example. A borrower writes a post-dated check to the lender for $500, and receives a loan for $425, at a nominal interest rate of 17.65 percent. When the loan comes due (typically in 14 days), either the borrower must repay the loan with fees and interest, or the lender will deposit the post-dated check. In case you thought credit cards had high annual interest rates at 36 percent, check out the payday lender at an APR of 459 percent.

Furthermore, if the borrower cannot repay the loan when due, he may also become liable for bounced check charges when the lender deposits the check, and then become the target of collection action and potentially of civil prosecution. For this reason, payday lending is often referred to as a “debt trap” from which a victim is hard-pressed to escape.

Tennessee has the unsavory distinction of being one of the birthplaces of payday lending. The business is extremely profitable and has so far been successful at fending off efforts to bring the industry under the usury laws to which legitimate lenders are subject.

For someone considering a payday loan to pick up a few Christmas gifts, or to pay a couple of bills during the holiday season, take this advice: Don’t. Alongside furniture rent-to-own and title pawn stores, payday loans are a one-way trip to the poorhouse.

Christopher A. Hopkins, CFA, is a vice president at Barnett & Co. in Chattanooga.

Comments do not represent the opinions of the Chattanooga Times Free Press, nor does it review every comment. Profanities, slurs and libelous remarks are prohibited. For more information you can view our Terms & Conditions and/or Ethics policy.
jeffy01 said...

Good grief.....a guy from an investment firm wants to tell the middle class how to handle their money! What a joke. Why doesn't Mr Hopkins tell us about his bailout...or maybe his fees he charges! I suspect he has never needed $100 in a bind. What a hypocrite. APR is for annual loans...not a two week fee. Even us 99% crowd can do that math.

November 30, 2011 at 11:13 a.m.
papm said...

Jeffy01 Do you work for one of Carey Browns or Allan Jones companies. I have friends that work for AREA 203, ACH FEDERAL, or Terenine, whose sole purpose is to support Mycashnow and the other entities that are owned by these people, none of these show the owner in the corporate docs and all of them are in sovereign lands, or the bahamas and Antigua. If it was not shady why do they hide their entities? Also why tell their employees to troll for comments and articles and post "anonymous" comments? It is a shady business at best.

November 30, 2011 at 11:30 a.m.
jeffy01 said...

This guy Hopkins says his MINIMUM fee he charges is $5000! $5000!!!! Really. Papm huh?

November 30, 2011 at 11:43 a.m.
billmiller said...

There comes an occasion when everyone runs out of money. It is normal. The question then becomes: is it preferable to get a pay day loan for the bills or just let myself get overdraft charges? Addressing the question is simple. It will not take a lot of effort. Since overdraft charges can hurt your credit score and cost more than a payday cash advance often times, it can be preferable to get a payday cash advance. The financial institution will be happy with you and your credit. To learn more, go to: About online payday loans

December 2, 2011 at 12:40 a.m.
AliceSmith said...

People who take payday loans are not middle or upper class people most of the time. These are people who are about to lose the family apartment, which means homelessness and in some places losing their children as a result. Predatory towing often takes place in much the same manner. They prey on working class citizens who need the car for work the next day or face losing their only source of income. Granted the APR for no credit check loans is high, but if you have the money to lend these people and want to take the credit loss risks, go ahead. Otherwise, stop the bashing of these credit products and offer an alternative form of short term credit.

April 17, 2012 at 2:32 p.m.
morganw said...

I have used a pay day loan occasionally when a big unexpected bill pops up. I pay $36 to borrow $200 for 2 weeks. A bank charges you $35 to borrow $1 if you make a mistake doing math in your check book. Who are the rip off people here? One time I used the wrong deposit slip (my mistake) and my bank charged me $175 in fees for 5 $4 lunches on my ATM card even when I had $1600 in a savings account in the bank. Yes I made a mistake but the bank could have just transferred some money or taken 5 minutes to call me. By the way most banks have a way to make your card be turned down if funds aren't available but you have to ask for it. Then they often "forget" to keep that feature turned on also. Better a devil you know at the pay day loan place that is honest about his fees up front than your good buddy banker that will twist the knife he drives in your back when you are shaking his had in friendship.

May 22, 2012 at 5:56 a.m.
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