Payday Lenders are Legalized Loan Sharks

Jan 25, 2012
Oreen Scott

: Payday lenders flourish - imelenchon

Strong regulatory laws govern banks and credit unions, but payday lenders aren't subject to these regulations.

Payday lenders are not a banking alternative. Use a payday lender if you must, but only as an absolute last resort. Know what you're getting yourself into, and get yourself out as quickly as possible.

The Guardian, an English newspaper, describes payday lenders as businesses who "prey on the vulnerable."

Whether it's an online short-term lender or a storefront operation, there's little doubt that in Canada, the United States and Great Britain, these lenders are servicing a certain segment of society.

Statistic Canada refers to these businesses as fringe banking, or alternative consumer credit market, and points out "most statutes applicable to mainstream financial institutions don't apply."

In the early 1990's, there were two hundred such operations in the United States. Now, there are over 22,000. In 2004, there were 1,200 in Canada.

The Financial Consumer Agency of Canada estimates the following costs for fourteen day, $300 loan. If you borrow from a payday lender the cost will likely be around $50 (435%/annum) if you use a cash advance from your credit card, the cost will be about $4.13 (36%/annum). If you have a line of credit, your cash advance would be roughly $1.15 (10%/annum.)

Two questions begged to be asked. Who would choose to use a payday lender and can they, and do they, actually pay the money within the specified time?

England's Yorkshire Post reported that sixteen percent of the people utilizing payday lenders were zombie debtors, which means they were only able to pay the interest on their debts.

Who Utilizes the Services of a Payday Lender?

In 2007, The American Federal Reserve Board did extensive research to develop the profile of a typical payday loan borrower. The results were published in February 2009. The statistics indicate that there are a disproportionate number of young families, especially those headed by women raising children on their own. There are proportionately more African Americans than whites. Fewer own homes, or have assets than those not utilizing payday lenders. Furthermore, they have a mean family income of $32,614.

According to Statistics Canada, one percent of the recipients who received payday loans for their families were over forty-five years old. Whereas, ten percent receiving payday loans for their family were between the ages of fifteen and twenty four. 7.1 percent of Canadians, who are in the bottom twenty percent income level, use payday loans. But, only 1.5 percent of those in the middle quintile do. Less than two percent of payday loan consumers have credit cards. 11.4 percent have been refused a credit card.

Generally, people who borrow from payday lenders are poor, with few assets, under educated and young. Frequently they are single women raising families.

Why do They Borrow from a Payday Lender?

To begin with, payday lenders market in a specific way. They advertise they are the low cost alternative to bouncing a check or accruing fees for late bill payments. Also, they say that paying bills on time will either maintain or lead to a good credit rating.

When the 2007 Canadian Federal Reserve's Triennial Survey was conducted, a question as to why a payday lender was used instead of a bank was asked. Two of the reasons given were, convenient hours of operation and ease and speed of approval. However, with online banking people with a solid relationship with a bank can simply transfer funds from their line of credit into their checking account. It's convenient and instantaneous.

Perhaps, the other reasons given for utilizing a payday lender were more honest. They had a poor credit rating, or a previous bankruptcy.

When asked why they needed a payday loan, thirty-four percent responded that they liked the convenience. Twenty-nine percent said they had an emergency; twenty-one percent reported they needed money for basic necessities, such as food or gas. Surprisingly, only eight percent stated that no other option was available to them.

Could it be that individuals who utilize payday lenders don't understand the banking system? Most banks, if not all, provide sound financial advice and are prepared to work with those who want to find their way back to the road of sound finances. A lack of education may be the major reason people use payday lenders.

Legislating Payday Lenders

In Canada, legislating payday lenders is a provincial matter. Some provinces have capped the interest rate payday lenders are allowed to charge at twenty-three percent per annum.

In the United States legislation is primarily a state matter. Twelve states have banned payday lending operations.

Sources:

Oreen Scott - After twenty-two years in the newspaper business, three years ago Oreen sold her house, car and almost everything she owned. A Canadian by ...