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Payday lending

According to the Center for Responsible Lending refers to payday loans as “predatory lending” and sites a statistic that twelve million Americans become trapped in a cycle of payday lending at 400% interest every year. Unfortunately, this section of the industry is growing rapidly in spite of an FTC crackdown. Previously, only store front finance companies offered this product. Recently, banks and credit unions have started offering it because it is a highly profitable type of loan.
In theory, the payday loan is a short-term loan, typically of a small amount anywhere from $100 to $1,000. The fee or interest rate is very high, probably one of the most expensive loans sold through legal channels. The fee is so high that it makes repayment extremely difficult. According to the Center for Responsible Lending, the average payday loan borrower used nine loans per year to pay off the first loan. For example, if the borrower’s initial loan was $325, he will pay more than $800 to repay the loan.

These loans go by many names, such as cash advances, check advances, post-dated checks, or deferred deposit loans. Borrowers need only prove they have a checking account and a source of income and they can get a loan. Borrowers either give the lender a post-dated check to receive the amount of the check less the fee, or the borrower can sign authorization for the lender to take money from their account on their payday.
On payday, if the borrower is unable to cover the full amount of the loan, they would need to renew the loan and pay another fee. For example, if the borrower needed $325 in the above example, she would initially receive $275 if the lender’s fee is $50. On payday, the lender would draw $325 from her checking account. If she doesn’t have enough to cover the repayment, she could extend the loan and pay an additional $50 fee, making the total due to the lender $375, when she was only given cash in the amount of $275. This is a vicious cycle many unwary consumers find themselves in and it is difficult to end.