Payday loan

A payday loan or paycheck advance is a small,charges, despite the fact that they (presumably) knew
short-term loan (typically up to $1,500 in the U.S.) that isthe check was bad at the time when it was written.
intended to bridge the borrower's cashflow gapLikewise, it is argued that the interest rates on payday
between paydays. Payday loans are also sometimeslending and on hire purchase contracts unfairly
referred to as cash advances, though that term candisadvantage the poor, compared to the middle class
also refer to cash provided against a prearranged linewho pay at most 25% or so on their credit cards.
of credit such as a credit card.Defenders of the higher interest rates note that
Processpayday loan processing costs do not differ much from
The loan is typically given in cash and secured by thetheir higher-principal, longer-term counterparts such as
borrower's post-dated check that includes the originalhome mortgages. They argue that conventional
loan principal and accrued interest. The maturity dateinterest rates at these lower dollar amounts and
usually coincides with the borrower's next payday. Onshorter terms would not be profitable. For example, a
the maturity date the lender processes the check$100 one-week loan, at a 20% APR (compounded
traditionally or through electronic withdrawal from theweekly) would generate only 38 cents of interest,
borrower's checking account if the borrower does notwhich would fail to match loan processing costs.
first repay or service the loan in person.A study by the FDIC Center for Financial Research
Payday lenders typically operate small stores orfound that “operating costs lie in the range of
franchises, but large financial service providers alsoadvance fees” [collected] and that, after
offer variations on the payday advance. Somesubtracting fixed operating costs and
mainstream banks offer a "direct deposit advance" for“unusually high rate of default
customers whose paychecks are depositedlosses,” payday loans “may not
electronically. When a consumer requests the directnecessarily yield extraordinary profits.” Based
deposit advance they receive a predetermined, smallon the annual reports of publicly traded payday loan
cash advance. On the next direct deposit into thecompanies, loan losses can average 15% or more of
consumer's bank account that advance amount isloan revenue. Underwriters of payday loans must also
removed by the bank plus a fee for the advancedeal with people presenting fraudulent checks as
(usually around 10-20%). Income tax preparation firmssecurity or making stop payments.
including H&R Block partner with lenders to offerPayday loan makers also argue that the interest on a
"refund anticipation loans" to filers.payday loan is less than the costs associated with
In the United States, most states have usury lawsbounced checks or late credit card payments. For
which forbid interest rates in excess of a certain APR.example, bouncing a $100 check may inccur an NSF
Payday lenders operate in those states by fundingfee from the bank of $28 and a returned check fee
loans through a bank chartered in a different state.of $25 from the merchant.
Under the legal doctrine of rate exportation, establishedIn comparison, when expressed as APRs for
by Marquette Nat. Bank v. First of Omaha Corp. 439two-week terms:
U.S. 299 (1978), the loan is governed by the laws of$100 pawn loan with 20% service fee= 240% APR;
the state the bank is chartered in. This is the same$100 payday advance with $15 fee= 391% APR;
doctrine that allows credit card issuers based in South$100 bounced check with $48 NSF/merchant fees =
Dakota and Delaware — states that1,251% APR;
abolished their usury laws — to offer credit$100 credit card balance with $26 late fee = 678%
cards nationwide.APR;
Example$100 utility bill with $50 late/reconnect fees = 1,304%
For example, a borrower seeking a payday loan mayAPR.
write a post-dated personal check for $115 to borrowWithdrawal from North Carolina
$100 for up to 14 days. The check casher or paydayOn March 1, 2006, the North Carolina Department of
lender agrees to hold the check until the borrower'sJustice announced the state had negotiated
next payday. At that time, the borrower has the optionagreements with all the payday lenders operating in
to redeem the check by paying $115 in cash, orthe state. The state contended that the practice of
refinance ("roll-over") the check by paying a fee tofunding payday loans through banks chartered in other
extend the loan for another two weeks. If thestates illegally circumvents North Carolina law. Under
borrower does not refinance the loan, the lenderthe terms of the agreements, the lenders will stop
deposits the check. In this example, the cost of themaking new loans, will collect only principal on existing
initial loan is a $15 finance charge, or 124 percent APR.loans and will pay $700,000 to non-profit organizations
Many states do not allow rollovers or limit the numberfor relief.
of rollovers but, for example, if the borrower choosesPayday loans in Canada
to roll-over the loan three times, the finance chargeAccording to the Canadian Criminal Code, any rate of
would climb to $60 to borrow $100.interest charged above 60% per annum is considered
Controversycriminal. On August 14, 2006, the Supreme Court of
As a form of sub-prime lending, similar to high interestBritish Columbia issued its decision in a class action
rate credit cards, payday lending is the subject oflawsuit against A OK Payday Loans. A OK charged
controversy. Some critics claim that payday lendersits customers 21% interest, as well as a "processing"
target the young and the poor, near military bases andfee of C$9.50 for every $50.00 borrowed. In addition a
in low-income communities, who may not understand"deferral" fee of $25.00 for every $100.00 was
the time value of money. Others go further, comparingcharged if a customer wanted to delay payment. The
payday lenders to loan sharks due to high interestjudge ruled that the processing and deferral fees were
rates — typically 250% or more wheninterest, and that A OK was charging its customers a
annualized. There have been reported cases in whichcriminal rate of interest. The payout as a result of this
payday lenders have pursued criminal bad checkdecision is expected to be several million dollars.