Sometimes, payday can’t come fast enough. As someone who derives income as a freelancer, the game that many clients play goes something like this: “Get my work done, like, yesterday! And as for your check, our terms are 90 days net, unless the payroll person has the day off and forgets to file your invoice.”
If monthly cash shortfalls have become a way of life — or make you feel like you’re hanging on just to pay the bills — perhaps you’ve used (or once remotely considered) a payday loan service.
As the name implies, these loans are cash advances on a paycheck, and meant to be used for a period of about two weeks until your funds arrive from work. For this convenience, you pay a fee that might run around 15 percent per $100 borrowed.
Search for “payday loans” and you’ll find a barrage of ads and pushy Websites promoting them. Dig deeper and you’ll find an equal number of people warning you how evil they are and to stay far, far away.
Opinions on payday loans are rarely lukewarm. To the industry and their clients, payday loans represent a way to keep ahead of bill collectors with zero tolerance for late payments. These loans also do not require a credit check, so they’re available to millions of Americans who don’t have a credit history for one reason or another.
Others — including most personal finance bloggers and probably many of you — look at the high costs and aggressive marketing associated with payday loans and cry foul, fearing that the customers who use them are exploited and end up trapped in a cycle of debt and never-ending fees. You would never be so foolish as to use such a product.
Where does the truth lie? I reviewed recent research and spoke with an executive in the industry. I’m not defending certain bad actors in the industry nor recommending you go out and get one of these loans, but here’s a perspective on payday loans that’s rarely discussed objectively.
Survey: Payday Loan Customers Know What They’re Doing
Insofar as loan service clients are concerned, they know exactly what they’re doing. So says a new Harris Poll, commissioned by the Community Financial Services Association of America, that for the first time examines the motivations and rationale of those who use payday loans.
More than 1,000 respondents ages 18 and over were polled, and of those, more than 90 percent said their payday loan experience went as expected or better than expected. And more than four in five borrowers (84 percent) reported that it was very easy or somewhat easy to repay their loans.
Industry: We Provide a Valuable, Affordable Service
“The Harris survey clearly demonstrates that the payday loan is an important and valued short-term credit option,” says Jamie Fulmer, Senior Vice President of Public Affairs at Advance America, the nation’s largest provider of small-dollar loans. (He’s also a founding member of the CFSAA.) “Only consumers are in a position to say what financial products and services work best for their personal and economic situation. Their ability to access regulated short-term lending must be preserved, with limited government interference.”
Did you catch the last part of Fulmer’s quote? Last month, the federal government placed tougher restrictions on banks that have entered the payday loan game. Here’s what Comptroller of the Currency Thomas J. Curry said in a statement: “Deposit advance products share a number of characteristics with traditional payday loans, including high fees, short repayment periods, and inadequate attention to the ability to repay. As such, these products can trap customers in a cycle of high-cost debt that they are unable to repay.”
To be clear, Curry was talking strictly about banks and federal savings and loans in the payday loan business. But phrases such as “high fees,” and comparisons to “traditional payday loans,” point to a bias that many in the financial world have against this short-term credit option in general. In fact, if you were to spread out a payday loan over the course of an entire year, the APR would equal a staggering 391 percent.
But that’s not at all how payday loans are meant to be used, Fulmer says, adding that you have to weigh a payday loan fee against the consequences a borrower might suffer if they let, say, a credit card or utility bill run late. Credit card balances of almost any amount carry $35 late fees when they aren’t paid on time; overdraft fees in a checking account might run $50 or more; and fees to reconnect shut off utilities typically run the same amount.
“Payday loans can be a sound choice and an effective short-term financial tool for many people who use them to manage periodic gaps in finances, or unexpected financial challenges,” Fulmer says. “In fact, most borrowers use them only for a short time and, according to the survey, 96 percent borrow responsibly.”
Fulmer adds that there’s an important distinction to be made between regulated and unregulated lenders in the short-term lending space, who operate outside the confines of state and federal laws. Reputable lenders work with customers to assess credit needs and options, and should fully and clearly disclose all terms and fees. “The same cannot be said of the bad actors in the short-term lending space that tarnish the good reputation of regulated, legally compliant lenders,” he says.
Make Up Your Own Mind (With All The Information)
If anything emerges from the survey, it’s this: An overwhelming majority of payday loan clients know what they’re getting themselves into—and if you choose to go that route, so should you.
Is it fool-proof? No.
And can you wind up paying big? Yes, but that’s just as true of any credit card that hits you with late fees or a sudden interest rate hike based on a technicality. If we believe the Harris Poll, only a small percentage of payday loan clients get into trouble. What percentage of credit card users end up rotating balances at high APRs for years? Probably many.
Even banks themselves, which used to offer free checking and other gratis services, have found numerous ways to tap and zap their clients with all sorts of surcharges and fees. So there are risks just about anywhere you go to borrow money, or even keep your liquid cash safe.
As for whether I’d take out a payday loan myself, that depends. The credit line associated with my checking account acts very much like a payday loan, spotting me until late vendors come up with the cash I’m due. In the meantime, I’m working for the day when my checking account is properly seeded with enough of a cushion that I won’t need a credit line or payday loan.
But until that happens, I might consider the payday loan as a viable option — short term, to be sure — but still viable.