Payday Loan Companies Charge too Much and Deliver Too Little

With their outrageously high interest rates and unreasonable payment schedules, payday loans are a very expensive way for people to borrow money.”Payday Loans” as they are referred to, are short-term loans for a small amount (typically under $500), which usually come due on the borrower’s next payday. These loans generally charge a fixed fee on the amount you borrow and after you pay them back, if you do, your rates can top at 500% or more.

At least 16 states have banned or capped payday interest rates at 36%, but it certainly isn’t the norm. Several states have introduced legislation to mandate regulations.  On April 6, New Mexico Gov. Susana Martinez essentially banned payday loans when she signed a bill eliminating small loans with terms less than 120 days, and capping interest rates on small loans at 175%.

In Ohio, a bipartisan bill was introduced in April, and calls for the interest rate on payday loans to be capped at 28% plus a monthly fee of 5% on the first $400 loaned, or $20 maximum. The bill has now been referred to Ohio’s House Government Accountability & Oversight Committee.

Kansas and Nebraska have similar bills in the works, and in 2010, Colorado led the way by passing a law that lengthened the period of loan repayment from 2 weeks to 6 months. It also caps loan interest rates at 45%.

WHY can’t people access loans the traditional way?

According to Pew, 12 million people use payday lenders each year, borrowing $9 billion annually. The issue is that these loans – with their exorbitant interest rates – have to be repaid in a short amount of time, and if they aren’t paid on time, borrowers are hit with extra fees and finance charges. This practice can create a cycle of debt, with the average borrower ultimately paying $520 to repeatedly borrow the same $375.

“Typically, payday loan borrowers can’t pay expenses while also repaying the loan, so they have to borrow again,” said Alex Horowitz, senior research officer at Pew Charitable Trusts.

Poor credit, limited resources, and expenses that are greater than income, have all lead to this burgeoning industry, while there are very little absolutes in this world, one thing is for sure, payday loans are a very poor idea for people who cannot meet their current monthly cash flow responsibilities.