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Wednesday, March 29, 2017

Issues with Payday Loans

Posted by Tim Stobbs on October 9, 2007

I’ve never used a payday loan. In fact the only information I really knew about them was that they charged a lot of interest. So when I had a request from National Payday about doing a paid post about payday loans I thought it would be a good idea to do a paid little research since I have yet to cover this topic before.

First the basics, what is a payday loan? A payday loan is a loan for a smaller amount of money (up to $1500 and typically less for first time loans) for a period of a few weeks. The basic idea is the loan is only supposed to be used to bridge someone between pay cheques. It is some what similar to a bridge loan from your bank for a house deal. Really high interest rate, but for a short time.

The payday loans has been in the news off and on for years about how they prey on poor people. This I disagree with, since after all no one forced you to take out that loan. You read the deal and if you didn’t understand it you should have asked questions. I can’t stand people that complain about things when it was their own fault in the first place.

Now as I touched on earlier the interest on these loans are high. For example, interest from a few different sites I looked at ranged from 20 to 30% of the original loan amount. Which to you or me this seems high. After all people with good credit can have a line of credit at prime plus 2.5% fairly easily (under 9%). Yet that 9% is annually. That 25% is over a matter of weeks. So translating that 25% fee to a annual interest rate results in a rate of 500 to 1300% depending on the amount of days the loan is for.

So obviously a typical credit card interest rate would be cheaper. Yet these companies are still in business. How is that possible? Simple, they take on people with less than perfect credit. Which there are a fair number of people without savings or without any support tend to find themselves using a payday loan. It’s not the end of the world if they do, but there is some high fees/interest involved. So overall I would suggest you be very wary of using these loans.

Comments

11 Responses to “Issues with Payday Loans”
  1. Canadian Dream says:

    Ok, this was my first ever paid post. So the obvious question is did I sell out? I don’t think so.

    I tried to keep the entire thing balanced in the regards I didn’t go on a witch hunt about payday loans in general, yet I did point out even a credit card would even be better.

    Feedback is always welcome.

    Tim

  2. Traciatim says:

    I don’t think you made it clear enough (without your comment) that it was a paid post. The introduction sounds like a paid post is coming in the future for National Payday, but the one you are currently writing is not.

    Anyway, people dump all over pay day loan companies all the time for their high fees and deceptive marketing. The problem is, if they really were that bad they wouldn’t exist.

    I look at it in a different light. Sometimes people mess up. Recently I miscalculated my end of month charges because I forgot about one of them. This would have made probably 3 trnasactions NSF on my bank account over the next day or two. Luckily I had family that I could get funds in my account quickly and only one of them failed which was arranged to be paid the next day. If I didn’t have my family that would have cost me $120 (40 per) for the NSF charges. Which is better, NSFing 3 transactions or taking a payday loan for a couple hundred bucks.

    Now sure, like anything on the planet there are people that abuse the available tools. You have junk food available you get obese people, you have gambling available you have people that can’t eat because of their gaming, you offer payday loans for legitimate reasons and you have people taking them every other week.

    The companies can’t control people’s behavior, but they can offer any service they please. The market itself will decide if they are useful or not. If the market decided that payday loans were far too expensive and deceptive, they wouldn’t be popping up on every third city block.

  3. Traciatim says:

    P.S. I would bet most people who use these services can’t get a Credit Card.

  4. FourPillars says:

    I don’t care if bloggers do paid posts but I would rather they clearly state at the beginning of the post that it’s sponsored so that I don’t have to read it.

    Mike

  5. telly says:

    Ugh…I disagree. These companies do prey on the poor and the desperate and often times, it wasn’t “their fault in the 1st place”.

    I believe one of the biggest problems in poor societies and neighbourhoods is lack of education. And that’s the biggest reason that the payday loan companies set up shop in those neighbourhoods.

    Whatever happened to being socially responsible? Offering a loan to someone that charges 500% APY is ridiculous and should be illegal (isn’t it?).

    Do you think that each and every person that defaulted on a sub-prime mortgage deserved it? Even if you believe that, we now know that much of the rest of the world is facing the consequences of that. Most of the World banks have injected liquidity into the markets because the big banks bought sub-prime backed notes. Shouldn’t they have known better? If a major bank can be fooled into buying crappy investments and not be faulted, why do we put so much blame on Navy Ned from Ohio who wanted to buy a house for his family? Or Single Mom, Minimum Wage Sally who needs to buy food for her children but doesn’t get paid until Friday? We need to find ways to help them, not give them methods to put them further into debt.

  6. Mr. Cheap says:

    I *hate* “cash-a-cheque” places to the point all my friends just start nodding and saying “yeah, we know, you hate them” every time we drive past one.
    HOWEVER, I do feel what they’re doing is (and should remain) legal. I don’t think people should do business with them, but if people decide for themselves, that’s their business (much like cigarettes or booze – no one needs them, but I’m not going to prohibit anyone from consuming them if they’re an adult and they make that choice).

  7. FourPillars says:

    I don’t have a problem with bloggers doing sponsored posts although I’m not crazy about it.

    I think the normal standard is to clearly indicate that the post is sponsored in the first line ie “This is a sponsored post” so that I can skip it without reading. In this case I didn’t realize it was sponsored until I read your comment.

    Mike

  8. I think of these payday loan places as “government approved” loan sharks. One step below government approved lotteries and casinos.

    CM

  9. Traciatim says:

    “One step below government approved lotteries and casinos.”

    Yet kilometers ahead of NSF fees for a few transactions because of a miscalculation or a memory mishap.

    I found an interesting article on http://www.parl.gc.ca/information/library/PRBpubs/prb0581-e.html that stated when surveyed only 10% of the users responded to using the service more than once a month. 12% stated around once a month. However 48% and 20% said Less than once a year and a few times per year. 9% responded every few months.

    This leaves us with 77% of the users used it only every few months or less.

    Also keep in mind this survey was for Payday Loans AND cheque cashing. The most frequently reported use of the services offered were cheque cashing at 57% of the people surveyed. Only 25% of the people surveyed used the payday loan service.

    Guess what you hear all over the media? Poor old Billy Jim Bob getting taken advantage of because he’s in an endless spiral of payday loans trying to keep up with his old age cheque.

    Like with most other things on the planet, it’s your on responsibility to take care of yourself.

  10. Canadian Dream says:

    Ok, I thought the phrase “it would be a good idea to do a paid little research since I have yet to cover this topic before” was fairly clear that the post was sponsored. Yet it that wasn’t clear enough I can always do a little header line, if I ever do this again.

    Telly – I agree there is a general lack of education, but the responsibility for people’s actions still lies with themselves. Government and education systems can only do so much. After all how many people in Canada do you think carry a credit card balance? Payday loans are just one step removed in my mind. As to the criminal aspect you are partly right. In Canada you can only charge interest up to 60%, after that it is criminal. Yet the law I don’t believe applies to fees, which is how the agreement is worded to avoid that issue (if I’m wrong, someone please correct me).

    CM,

    I don’t pretend to like the industry, but you should check your mutual funds and see if you own any payday loan stocks. I think a lot of people are supporting this industry without realizing it.

    Traciatim,

    Excellent article. Thanks for the link and your comments. It’s good to hear most people don’t really use these loans.

    Tim

  11. The question is Tim “how much did you ask for” and did the vet the post.

    I think this product is beyond review – although your comments are fairly balanced and it was clear to me that it was a “paid for post” I believe it does devalue your “blog brand” and makes one suspicious of future posts.

    An interesting experiment but I would not repeat this is I were you. UNLESS they paid exceptionally well :-))

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