It doesn't take much detective work to discover the payday loan truth. (Photo: ThinkStock)
In the financial news industry, the media will periodically run an anti-payday loan story in which the same talking points are used. In the case of a recent Lansing State Journal article entitled “Going with payday loans might not be worth fees,” those talking points include 391 percent annual interest and varying levels of state regulation. As we’ll see, these are instances of politically convenient bullet points that fail to address the full reality of taking out a payday loan.
A payday loan in Michigan is not an annual loan
For consumer convenience, the Truth in Lending Act (a federal law) requires that all consumer loans – including payday loans – clearly advertise the annual percentage rate (APR) charged. For an annual loan, this is useful. However, while a payday loan is a consumer loan, it is not an annual loan. In Michigan, the average fee (interest) charged per $100 on a two-week payday loan is about $15. That’s 15 percent, or $15 dollars above the principal loan amount. The Journal reporter admits that the payday loan in Michigan ranges in term from as little as seven days to as many as 31 depending upon the lender, although two weeks is standard. Does that sound like an annual loan to you? If it were, you’d be paying 391 APR in interest. For a two-week payday loan, $15 is 15 percent interest paid.
Some lenders charge more than others
The Lansing State Journal is right to advise consumers to “be careful.” Researching the best lender rates ahead of time makes sense and is advised by any pro-payday loan group worth its salt, including the Community Financial Services Association. While some lenders charge $15 per $100 loaned, others may charge more. It varies by lender, and regulations vary by state.
However, the example the Journal uses is suspect because of its lack of context. A payday loan customer named William Lee claims he had to pay back $400 for a $250 payday loan. There is no mention of whether Mr. Lee defaulted on his loan, perhaps because he borrowed more than he could afford to repay. There is also no mention of any other loan terms. As the Michigan Office of Financial and Insurance Regulation allows a maximum of $35.50 (plus a 45-cent database verification fee) charged on a $250 transaction, it seems likely that Mr. Lee either defaulted or the lender he used was operating under the radar. It’s impossible to say for certain based on the article, which makes the Lansing State Journal’s piece nothing more than an unsupported scare piece straight from the Center for Responsible Lending’s playbook.
Do your research, and don’t choose based on emotion
A payday loan can be a useful tool in the right situation. If a consumer shops for the best rate and avoids borrowing more than they can afford to repay on their next payday, there should be no trouble. Impulsive action can lead to financial ruin, whether a consumer is looking for a payday loan, a mortgage, an auto loan or a host of other things. Research lenders online, make sure you understand fees charged before you apply and let the numbers do the talking. The annual APR scare tactic the Lansing State Journal and Center for Responsible Lending use is just that.
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