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Payday Loan Lenders’ Math

The payday loan lender Check n Go is circulating a video that purports to explain how the triple-digit annual percentage rates they charge their customers aren’t really triple-digit annual percentage rates:

The argument goes that you’re not really supposed carry a payday loan for a year — only until your next payday — and that other financial products would also appear to carry monstrous interest rates if they reported their fees as an APR.

The problem is, that despite the payday loan services’ marketing, most payday loan borrowers end up repeatedly taking out new loans because they can’t get out of the hole. Research has found that borrowers of payday loans are more likely to end up filing for bankruptcy than consumers who are denied payday loans because of bad credit.

Payday lenders are trying to influence the discussion of how they disclose their rates now because a bill is pending before Congress that would cap the APR they charge, nationwide, at 36%. Seems like a good idea.

But in the meantime, here are some alternatives to payday loans, as suggested last year by the Federal Trade Commission:

1. Consider a small loan from your credit union. Some banks may also offer short-term loans for small amounts at competitive rates. Some local organizations may make small business loans to people. And cash advances from credit cards, though also expensive, are likely to offer better rates than payday lenders.
2. Shop for the credit offer with the lowest cost, including interest rates, loan fees and other costs.
3. Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills but make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.
4. Contact a consumer credit counseling service if you need help working out a debt repayment plan or developing a budget. Non-profit groups offer these services for little or no cost.
5. Make a realistic personal budget and stick to it, including a plan to set aside for savings. A savings plan can help you avoid borrowing for emergencies.

Here, by the way, was the response that the Center for Responsible Lending produced to Check n Go’s video: