Does a Cash Advance Really Qualify as “Predatory Lending”?
For millions of Americans, a cash advance can provide emergency funds to obtain medical care, keep the utilities turned on or handle a repair to the home or the family’s vehicle. Cash advances are short-term loans that are typically due in full when the borrower receives his or her next paycheck. However, in recent years, short-term lenders have come under increasing attack. One of the major criticisms aimed at companies that offer these loans is that they practice predatory lending — but do they?
Does a Cash Advance Deserve the Predatory Lending Label?
Despite what the critics claim, cash advance loans do not deserve to be lumped into the category of predatory lending. Evidence to the contrary can be found in the very definition of predatory lending provided by Debt.org.
• Predatory lending tactics include taking advantage of the borrower’s lack of understanding concerning the loan, its fees or its terms.
• Predatory lenders usually target the elderly, the less-educated, the poor and minorities.
• Predatory lenders often target borrowers who have lost their jobs recently.
• Predatory lenders fail to disclose the true costs of the loan.
• Predatory lenders require borrowers to purchase unnecessary products such as insurance to pay off the loan if the borrower dies.
• Predatory loans usually contain a clause requiring the borrower to pay an abnormally high penalty if the loan is paid off early.
Comparing these points to the reality of cash advance loans makes it easy to see that these loans do not deserve the negative reputation that many people have formed about these lenders.
Borrowers Understand the Loan Terms and Fees
The critics claim that lenders making short-term loans take advantage of borrowers who are financially naïve. However, multiple surveys of actual borrowers disprove this claim. For example, a study conducted by Harris Interactive revealed the following information.
• Approximately 89 percent stated that they had computed the overall cost before they took out the loan.
• About 95 percent stated that they had a complete understanding of the total cost to repay the loan.
• Approximately 97 percent reported that the lender explained the loan’s terms clearly.
The Average Borrower Is Not an Impoverished, Uneducated Senior Citizen
The Pew Charitable Trusts, one of the foremost critics of payday loans, has spent several years studying short-term loans. According to Pew’s own surveys, however, most borrowers are white females who are at least 25 years of age but younger than 45. A study conducted by Columbia University found that more than 50 percent of the borrowers had attended college. In other words, the average borrower does not conform to the profile of the typical target of a predatory lender.
Lenders Typically Exclude Borrowers Without Jobs
Targeting borrowers who have recently lost their jobs is not a tactic used by the typical lender offering payday cash advance loans. Lenders require a reliable source of income, and although this does not automatically exclude people receiving unemployment benefits, most lenders are reluctant to approve loans to these borrowers.
Legitimate Lenders Seldom Make Credit Life Mandatory
Many lenders offer credit life policies, and some borrowers choose to pay the premium so that their heirs will have the maximum protection. However, very few legitimate lenders would refuse to make a short-term loan solely on the basis of the borrower’s refusal to purchase credit life.
Lenders Never Charge Prepayment Penalties
Lenders who make cash advance loans want borrowers to repay their loans no later than the due date. However, borrowers are more than welcome to pay off their loans early. Although they will not receive a refund on the origination fees, they will not be charge a prepayment penalty.
However, Unscrupulous Lenders Are Out There
The overwhelming majority of lenders are honest, follow the law meticulously and care about their borrowers. As you probably know, however, whenever crooks see an opportunity for “easy money,” they can migrate to the source. Here are some signs that you are dealing with an unscrupulous or predatory lender.
• The lender refuses to disclose the total fees associated with the loan, including any fees for late payment.
• The contract contains blank spaces. Never sign a contract until all of the pertinent spaces contain an entry.
• The lender tries to coerce you into borrowing more than you need or can comfortably repay. A legitimate lender may offer you a larger loan than you request, but there will be no attempts to force you to accept the larger amount or receive nothing.
• The loan offer is made by a door-to-door solicitor or through an unsolicited telephone call. Rarely, storefront operations may distribute flyers or business cards, but they will not make you an offer while standing on your doorstep.
• Predatory lenders will not review the terms of the loan with you, and they may refuse to give you a copy of the contract to review before you sign the document. Always study the paperwork before you sign, ask for clarification if you need it and never sign anything that you do not understand.
When Payday Cash Advance Loans Become Dangerous
One reason that the critics consider these loans as predatory actually has more to do with the borrowers than the lenders. Payday cash advance loans are typically due in no more than a month. If borrowers do not have a clear plan to repay the loan when it is due, they may renew the loan or seek a loan from another lender. This can plunge borrowers deeper into debt or lead to excessive fees through repeated renewals.
The percentage of borrowers who repay these loans on or before their first due date varies by study. According to NPR.org, about 80 percent of the borrowers renewed their loans, and about 20 percent renewed seven or more times. However, that does not imply that borrowers were misled on how long it would take them to pay off their loans. The Harris Interactive study cited earlier found that 94 percent of the respondents stated that they knew how long it would take them to repay their loans, and the same percentage stated that they repaid the loan within the time that they had predicted.
In reality, a cash advance is like any other type of debt. If borrowers do not have a repayment plan, take out loans for frivolous purposes or do not ensure that they are dealing with a reputable lender, the loans can pose a problem. If borrowers practice responsible credit practices, however, these short-term loans can provide a lifeline when a financial crisis looms on the horizon.
Know Your Alternatives to a Payday Cash Advance
Cash advance loans can be an excellent option if you need a fast source of money for a short time. However, there are other options available. The more that you know about the alternatives, the easier it will be for you to select the product that works best for you. You can find many educational articles on various loan products at the Personal Money Store.