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Payday Loans – Easy Cash or Financial Fraud?

Payday Loans – Easy Cash or Financial Fraud?. www.mypaydayloan.com. History of Payday Loans. 1996 Law Change California Senate Legalized small, emergency loans from non-financial institutions Why the change? Save consumer money from “check clearing scandal”!

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Payday Loans – Easy Cash or Financial Fraud?

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  1. Payday Loans – Easy Cash or Financial Fraud? • www.mypaydayloan.com

  2. History of Payday Loans • 1996 Law Change • California Senate • Legalized small, emergency loans from non-financial institutions • Why the change? • Save consumer money from “check clearing scandal”! • No one will help cash strapped individuals

  3. Is It Such a Bad Thing? • Payday loan fees – www.checkexpress.com • 11 day loan for $100 • 17.5% fee • Total payback of $117.50 • Not so bad, just 17.5% rate!

  4. That’s What You Think! • Not 17.5% APR, but rather 580.68% annualized rate! • How can they get away with this? • Must disclose period rate of loan, not APR! • No limits on how much they can charge!

  5. How Bad Can it Get?

  6. How Can This Be Legal? • These consumers are “high risk” • How would consumer pay bills without this service? • A one-time only quick fix • Is illegal in some states, but… • Still done through “Sale-Leaseback” loophole • Glorified “Loan Sharking” without Guido and broken legs

  7. Other Services Offered • Car Title Loans • 20% per month (240% APR) • Check Cashing • Payroll Check = 1.99% • Handwritten payroll check = 2.5% • Personal Check = 5% • Out-of-state personal check = 8%

  8. Hypothetical Profile: True Cost • Worker earns $8.75/hour = $350/week • Cashes each check for $6.97 per check • Costs him/her $362.18 for 52-week period, or more than one week’s pay

  9. So… why do people use these services? • Average customer takes out 10-12 loans per year • Foreign workers intimidated or overwhelmed by the financial system • All storefronts have neon Se Habla Espanol signs • Prey on individuals who struggle with the language or the financial system • Poor workers who: • Don’t have a bank account • Don’t have any or have bad credit • Don’t read or understand math

  10. Experience at Check City • Would not give me any documentation unless I took out a loan myself; so, unless I started signing • Individuals coming in to take out loans asked “How much would it cost me to…?” instead of “What is the percentage yield on…?” • All APR were clearly posted, but no one who came in paid attention to them • Very friendly until I told them I was getting information for a class

  11. Alternatives to Payday Loans • Take a loan from family • Ask for an advancement on pay from your employer • Take a small loan from a Credit Union

  12. "Credit unions become concerned that their members are being taken advantage of through that kind of lender," said Brett A. Thompson, president and chief executive of the Wisconsin Credit Union League. In the Landmark pilot program, which is available only through the West Milwaukee branch, customers who qualify receive unsecured loans of up to $1,000 at 18% annualized interest for 12 months. That amounts to a monthly payment of about $92. Landmark also offers a $1,300 loan with a financial education element that is intended to train the borrower to save money for emergencies and stay away from payday loans. The credit union lends $1,300 at 13.9% annualized interest for 12 months but allows the borrower to use only $1,000 of it. The other $300 must go into the loan customer's savings account. "This way, it gives them an alternative from paying that high interest rate," Ransom said. "They can pay it back over a longer period of time in smaller installments rather than having to pay the whole thing back in a couple of weeks. And they end up with a savings account at the end." Paul Gores, Milwaukee Journal Sentinel

  13. Alternatives to Payday Loans • Cash advance on credit card • Obtain overdraft protection on your checking account and use it • Ask your creditors for more time to pay your bills. Find out what they will charge for that service - as a late charge, an additional finance charge or a higher interest rate.

  14. Conclusion Use All Other Alternatives Before Taking a Payday Loan It's important to pay particular attention to the interest rate on payday loans. The rate on a payday loan may be 500% per year or more. Borrowing $200 for 2 weeks at 500% will cost you $38.36. Compare this to borrowing $200 for 2 weeks at 36% ($2.76) or 12% ($.92). If this loan is refinanced four times, the cost difference increases dramatically! In fact, it will cost you nearly $200 to borrow $200 for ten weeks:

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