The short term lending industry has dealt with a good amount of negative pr over the past few years. Many in the media are quick to put what is commonly known as “payday loan” industry under the microscope. They convert the fees the lenders charge to an annual percentage rate (A.P.R.) and show it in a very negative light, citing the A.P.R. as “over 450%.” That’s a misleading number, industry executives are quick to point out.
CashAdvanceUSA is headquartered in Ohio and is one of the largest payday loan companies in the Midwest. In fact when compared to other online payday loan companies in Ohio, they often report more loan volume each month than what some lenders do in a year. Along with most others in the online loan industry, it adheres to the same Truth in Lending practices that banks and credit unions do, as mandated by the Federal Government. This lender is highly regulated by both State and Federal agencies. They must submit to yearly audits and in some states regulators requite they show a breakdown of all loans underwritten for that calendar year.
When a bank issues an installment loan, it charges the borrower a percentage. The rate is figured over the long term, and the A.P.R. is stated. Over the course of a standard 30-year loan, at 5% interest, the amount the borrower pays in interest charges is more than the purchase price of their home. The online lender charges a fee, not a percentage rate. The typical short-term loan from CashAdvanceUSA is paid back in two weeks with fees of $30 per $100 borrowed. Converting that to an A.P.R. will work out to be an astronomical number. An online payday loan is not designed to be a long-term loan, and should not be regarded as such.
Because online cash advance lenders charge a fee, the comparison should be made to a fee that a bank charges – like an insufficient funds or “bounced check” fee. On average, banks charge a $30 NSF fee when it pays a check that takes the account below zero balance. The bank does this as a convenience to its customer to save him the embarrassment of bouncing a check. Most of the time, it is done automatically. We are seeing a few states begin to push back against these aggressive NSF charges. Ohio and California respectively have bills in place to limit overdraft fees.
Let’s say the check in question is $60 for the phone bill, and the fee is $30 because the account went below $0. The bank knows the customer will be depositing the money, so it has no worries. It just generates a notification and sends it through the mail. Converting the bank’s fee to an A.P.R. works out to be more than twice what CashAdvanceUSA or any other personal loan company states as its A.P.R. It’s an astronomical 1011%. The banking industry’s insufficient funds fees generate over $2 billion annually. Banks and credit unions have come under fire recently for these onerous NSF fees. But they continue to charge the fees and in some states increase the amount collected with no specific government pushback. It remains to be seen how this practice will play out in the second half of 2020 as we battle a recession and pandemic at the same time. But you can bet the focus will still be on individual payday loan companies opposed to the big banks that are constantly lobbying the Federal and State Governments.
An online lender provides a service for people who need short-term loan to solve a temporary financial crisis. Much like credit cards, consumers must use the service wisely. Pay back the loan quickly to avoid a high finance charge. Speak with your lender before you take out a payday loan and make sure they allow an early payoff with no prepayment penalty.