Payday loans trap consumers

Thinking about a payday loan? Please check out this article on the hazards of on-line payday loans. The author, Herb Weisbaum, is one of my favorite consumer news resources. He writes the ConsumerMan column for MSNBC.

The Weisbaum article focuses on the nastiness of on-line payday loans. Consumers who are desperate for quick cash can get sucked in to horrible deals with on-line payday lenders who often evade regulation.

The article notes a few horror stories that are worth marking. When on-line lenders charge interest rates of 800 percent, the borrower will be so deep underwater so quickly that the borrower can never pay down interest.

On-line lenders often require the borrower to provide social security numbers and bank information and automatic payment from the consumer’s bank account.  I suppose I could write a long and technical explanation about this using flowery legal language/ Not necessary. This is very simple. Don’t do it. It is a trap.

It’s easy for consumers to assume that regulations protect them in these transactions. Truth is that many states have no real regulations on payday loans.

Some states, like Oregon, cap interest rates. But the cap is 36 percent APR, and that does not include origination fees.  Yikes! For those who like things a bit more concrete, let’s do some basic math to show why these are bad deals.

If you borrow $3,000 for one year at 36 percent interest, your monthly payments will be $302.78 on that loan. That, of course, is a new payment on top of all the other obligations like food, rent, auto and the like. Assuming you manage to pay it off without rolling it over, you will have paide a total of $3,616.68. Not a pretty deal, and it gets worse if you don’t get it paid off and have to roll it over.

So here’s how it gets even worse with the on-line payday lenders. Many will set up shop off shore and claim that Oregon laws don’t apply to their loans. So instead of the high rate of 36 percent, they’ll charge 800 percent annual interest.

Here is what a small 800 percent interest loan looks like. A one-month $300 dollar loan adds over $200 per month in interest. And of course that interest payment is on top of the $300. So borrowing $300 for a month at 800 percent annual interest means you will owe a bit more than $500 in a month’s time.

It’s easy to see how people fall deeper down the hole in that situation. Look at this explanation from the Federal Trade Commission on how payday loans work to see how easy it is to get sucked under. The FTC piece is a bit dense, but it also contains suggestions on how to avoid the traps.

This isn’t a new issue. But the Weisbaum article prompted me to think about it again. In these tough economic times, I have no doubt that these loans are tempting. Just say no.

For further information:

Oregon consumer payday loan information (pdf) from the Oregon Department of Consumer and Business Services.

Oregon statutes relating to payday loans (scroll down to ORS 725.600 – 725.630)

Summary of states’ payday lending laws (Author’s note: I haven’t verified that this is accurate or up to date.)

loan modification says

Rubbish. Utter rubbish.

David Sugerman says

Really? Is that the best you can do? Which part is rubbish? The 800 percent interest? The off-shore problem? Or is it that some would dare to call into question the practices of unregulated payday lenders?


compare loans says

A subsidized loan means that the government pays your interest while you are in school. If you pay the loan while you are still in school then you would just be responsible for the principle.

David Sugerman says

Okay spammer. For you, I'm going to make an exception. Usually spam comments are deleted. But yours is idiotic and possibly fraudulent. I assume you are talking about federally subsidized student loans? You're in over your head about timing and amount of payment obligations. So stop peddling spam and bad information. Please.

Taylor Garwood says

Banks prefer good creditors, so they may decline you, or ask for a co-signer. Be sure your cosigner is a relative. Friends/boyfriends/etc are NOT good co-signers. I've been in the industry for years. Credit Unions are good if you already belong to them. They favor their members, however, they too, abide by the stricter banking trends of better credits. You may be able to get the loan from a finance company, but be prepared to pay with significant interest, and if you default, the collection process can be pretty ruthless. Good luck.

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