Myth: Payday loans are extremely expensive and have exorbitant interest rates.
Reality: Critics of payday lending options often cite an annual percentage rate of 390% to misrepresent the terms of a payday loan. In fact, the term of a payday loan is two-weeks, not a whole year. The typical fee on a $100 loan is only $15, or simply 15% over the two-week term. The only way a borrower could ever reach the triple digit APR cited by critics would be by rolling a loan over 26 times (a full year). Considering many states do not even allow loans to be rolled over once, this is unrealistic. In states the do permit rollover, CFSA members limit rollovers to a maximum of four, or fewer.
Supposing a loan was rolled over for an entire year, the corresponding APR is actually more favorable when compared the alternatives.
See how the rate on a $100 payday loan compares:
$100 payday advance with a $15 fee = 391% APR
$100 bounced check with $54 NSF/merchant fees = 1,409% APR
$100 credit card balance with a $37 late fee = 965% APR
$100 utility bill with $46 late/reconnect fees = 1,203% APR.
Myth: Payday loans trap borrowers in a never-ending "cycle of debt."
Reality: Although the phrase "cycle of debt" is a favorite among industry critics, it's not based on the truth. In states that permit rollovers, CFSA members limit rollovers to four or the state limit—whichever is less. The reality is that a loan cannot be outstanding longer than eight weeks (two-week loan rolled over four times).
Researchers and state regulators consistently report that 70 to 80% of customers use payday advances between once a year and about once a month. People who bounce checks and use overdraft protection often do so at a higher frequency. The fact is that a payday advance is more economical than other options.
Myth: Payday lenders take advantage of poor people and minorities.
Reality: Critics have convinced much of the public that the payday advance industry exploits those less fortunate, however this presents a warped picture of the industry's customers. Payday advance customers represent the heart of America's middle class. Typically; hardworking adults who may not have much disposable income to use as a safety net, and are unwilling to tap their often meager savings to cover unexpected expenses.
Here are the facts:
• The majority of payday advance customers earn between $25,000 and $50,000 annually;
• 68% are under 45 years old; only 4% are over 65, compared to 20% of the population;
• 94% have a high school diploma or better, with 56% having some college or a degree;
• 42% own their own homes;
• The majority are married and 64% have children in the household; and,
• 100% have the steady incomes and active checking accounts required to receive an advance.*
*Source: The Credit Research Center, McDonough School of Business, Georgetown University, Gregory Elliehausen and Edward C. Lawrence. Payday Advance Credit in America: An Analysis of Customer Demand. April 2001.
Studies that suggest the payday advance industry targets the poor and minorities, often group payday lenders with other financial services such as pawnbrokers, car title lenders and check cashing outlets. These businesses are different, and have a different customer base. By definition, all payday advance customers have steady jobs and active bank accounts.
Myth: Payday lenders loan money to people who cannot afford to pay it back.
Reality: More than 90% of payday loans are repaid when due, a fact confirmed by numerous state regulatory reports. Obviously, customers may not have the ability to repay when taking out an advance. Otherwise, they likely wouldn't be seeking a loan. However, the allegation that lenders do not consider a customer's ability to pay is completely false. Any competent payday lending operation has underwriting criteria in addition to the requirements of steady income and a checking account. The reason for these criteria is quite obvious; loans that are not repaid are bad for business.
Myth: Payday lenders do not want to be regulated.
Reality: It is quite the contrary. Our industry is currently regulated in 34 states, and CFSA is working to have regulation in all 50 states. While the industry of course, does not want to be regulated out of business (as industry critics would like), it has always supported sound and balanced regulations that protect consumers, while preserving their right to financial options.
Over the past decade, most states have created or maintained a regulatory environment that satisfies the robust consumer demand for these short-term low denomination loans, while making sure consumers aren't taken advantage of. Working with CFSA and consumer advocates, state policy makers have introduced regulations that address industry concerns provide substantive consumer protections. The results have allowed millions of consumers to benefit from the convenience and economic advantages of payday advance services.
Myth: Consumers win if payday lenders are regulated out of business.
Reality: Critics' allegations that consumers are better off without this option is far from the truth. Anti-business activists should not be in a position to determine what is right or wrong for hard-working Americans. So-called consumer interest groups and activists that work to ban the payday advance industry do not represent the vast majority of consumers who work hard to make ends meet. The bottom line is that consumers don't want others making decisions for them. They especially don't like the idea of people (who have probably never been short of cash) dictating where they can or cannot borrow money. If critics are successful in regulating the industry out of business, consumers will either be forced to pay ever increasing late payment penalties and over-draft fees, or turn to the often un-regulated offshore Internet lenders and dangerous loan sharks for their short-term credit needs.
At the end of the day, consumers win when they have a variety of options and are trusted to make financial decisions based on what's best for them and their families.
Myth: Payday lenders use coercive collection practices.
Reality: CFSA member companies are committed to collecting past due accounts in a fair, lawful, and professional manner. In accordance with CFSA's best practices, companies may not pursue criminal actions against a customer as a result of their check being returned unpaid. If it becomes necessary and is appropriate, however, companies may turn the account over to a collection agency.
Myth: Payday lending has grown dramatically because of aggressive marketing.
Reality: Payday lending has grown as a result of continued consumer demand and changing conditions in the financial services marketplace. Due largely to the high administrative costs, traditional financial institutions exited the small-denomination, short-term credit market. At the same time, bounced check fees, late payment penalties, and the costs of other short-term credit products rose dramatically. Consequently, the demand for new sources for small denomination and short-term loans became evident. In response to this new demand, legislation was enacted to create regulation and consumer protections that would allow the payday advance industry to fulfill the demands of the new market.
Myth: Payday lenders hide fees and mislead consumers.
Reality: The cost of a payday advance is fully disclosed to customers through in store signs and disclosure agreements. Moreover, in accordance with the Truth in Lending Act (TILA), the terms of the loan are clearly outlined in the lending agreement. Payday advances involve one-time flat fees and there are no hidden charges, balloon payments or accruing interest. CFSA members also provide an educational brochure emphasizing responsible use of the product and offer a free right of rescission should the customer change their mind.
In a recent survey, 96% of payday loan customers said they were aware of the finance charge. A recent study by the Annie E. Casey Foundation even found that, "Customers do make a cost analysis in comparing the price of a payday loan with the alternatives…"
Myth: Anti-payday lending activists have consumers' best interest in mind.
Reality: Anti-payday lending activists do not represent the views of millions of people who use payday advances responsibly and are glad to have somewhere to turn when they need quick access to credit.
The reality is that while they claim to act in the best interest of the consumer, anti-payday lending activists seek to limit the already small number of short-term credit options available to consumers in need.