News : Easy Payday Loans in Georgia

"Predatory Reporting" on Payday Lending?

July 18, 2008

Do payday loans sink people into inescapable debt, forcing them to pay many times more the original borrowed amount in interest?

Whether or not we are technically in a recession, a severe economic downturn looks likely, given the recent cascade of external shocks to our economy. One such shock is the crisis roiling the credit and financial markets. Widely described as a “credit crunch,” this crisis has narrowed the options of the typical consumer who needs quick access to cash to help manage household debt.

Last spring, for example, while the Ohio legislature was debating a bill that would toughen regulation of the industry, a Reuters dispatch from Cleveland quoted an economics professor who equated payday loans with "handing a suicidal person a noose." An editorial in the Cleveland Plain Dealer entitled, “Legislators protect payday lenders' interest rates at expense of constituents,” approvingly quoted NAACP head Julian Bond’s depiction of payday lending as "legalized extortion." And a CNNMoney.com headline asked whether payday loans were “ a quick source of cash or legalized loan sharking?” The question was rhetorical; the article quoted an industry critic who concluded, "Loan sharks are actually cheaper." 

Articles such as these frequently relied on statistics from a watchdog group called the Center for Responsible Lending (CRL), which portrays payday loans are the poster boy for financial predation. Their 2006 report “Financial Quicksand” argued that these loans catch consumers in a “debt trap,” which results in the “typical” payday borrower paying back $793 for a $325 loan. (note 1 ). They also argue that the fees for these two-week loans extrapolate to annual percentage rates (APR) as high as 390 percent. These alarming numbers have been repeated frequently in news media accounts; however, on closer inspection, they conceal more than they reveal.

A payday loan (also called a paycheck advance or payday advance) is a small, short-term loan that is intended to cover a borrower's expenses until the next payday. Payday lenders typically charge $15 for every $100 borrowed. According to the Community Financial Services Association of America (CFSA), the payday loan industry trade association, all that a customer needs is proof of income and a checking account.

The notion that $793 is paid back for every $325 loaned is even more deceptive. It suggests that an individual takes out a single loan of $325 and pays it off along with an additional $468 interest. In fact this number is based on CRL’s assumption that a borrower receives a $325 loan and pays a fee of $52 (16 percent of the loan amount) nine consecutive times, piling up $468 in interest before the borrower is able to pay off the principal. This is precisely the type of “rolling over” that is widely limited or prohibited by law.

A 2007 study by Veritec (a government contractor that provides program management to state agencies which regulate this industry) rebutted the notion of a “typical” payback of $793 for a $325 loan as a misrepresentation of Veritec’s own previously published data. After examining payday loan usage in Florida and Oklahoma, Veritec concluded that the data “simply does not support the CRL conclusion about fees paid...”

Source : http://www.stats.org