Most people have needed a quick loan at some point in their life, and going to a family member, close friend, bank or credit union to get financial assistance is usually the norm.
But some consumers choose payday loan companies to get help, and oftentimes they find themselves worse off for it.
It's easy to spot these loan companies, as there's a countless number of commercials which promise hard cash within 24 hours. The advertisements focus on solving the short-term financial challenges of the consumer, while obscuring the long-term challenges many face when trying to pay back the loan.
Here's how payday loans works: Companies like Ace Cash Express, and Advance America give a small short term loan, usually issued through a cashier’s check. The borrower will then postdate a check to the lender for the borrowed amount plus an interest fee. The lender then agrees not to cash the check until the borrower's payday.
Sounds simple, right? But check out these interest rates which were common before some very much-needed legislation was passed:
Consumers had to pay 911 percent for a one-week loan, 456 percent for a two-week loan, and 212 percent for a one-month loan, according to a loan fact sheet.
One would assume that payday loan companies sound way too fishy for most consumers to use, but surprisingly, many people feel otherwise.
According to a 2008 report by the credit union Community Financial, payday advance companies loaned $45 billion in credit in 2007. The majority of those customers were and still are, people who are underbanked and have lower-income.
Consumers may be catching on, though. ConsumerAffairs conducted a computerized sentiment analysis of more than 1.8 million comments posted to social Web sites over the last year and found net positive sentiments running as high of 72% a year ago, dropping sharply to 51% this month.
Looking at what people say about payday loans, consumers agree the loans are "fast," which is a plus, while a small but perhaps growing number recognize that the loans are "dangerous" and "expensive" -- both negatives.
In fact it's hard to find anyone who'll say anything good about payday loans, other than people who need money fast. Consumer watchdog organizations and politicians routinely accuse payday companies of taking advantage of those who are in no financial position to take out more reasonable loans.
However, loan companies say they are being unfairly targeted because they are providing an essential service for those people who need cash to get them through until their next pay check. They point out that, in most cases, no one else is willing to lend to their customers and that, in an emergency, even an expensive loan is better than none.
The loan companies also note that most of their customers have poor credit ratings, or no credit rating at all. Many have no bank account and basically live from one paycheck to another. By any measure, they are a high-risk group and, since interest rates are based largely on perceived risk, it's unrealistic to argue for lower rates.
There has been some legislation passed in favor of the consumer. There are currently 17 states in the U.S., including the District of Columbia, that make it illegal for loan companies to charge triple-digit interest rates. Lenders can now only charge a certain percentage according to each state's limit amount.
Legislation has also made it illegal for lenders to hide high fees in lengthy hard-to-understand contract agreements. Companies have to now list all fees in plain language.
In 2006, President George W. Bush signed a law making it unlawful for lenders to charge military families over a 36 percent interest rate after the Defense Department said predatory lending was affecting the nation's military readiness.
But those laws don't mean consumers are safe from high-interest loans and aggressive collection strategies.
"I got threatening phone calls from this company saying that I owe $545 for a loan that I never got," said Terri about Ace Cash in a ConsumerAffairs posting.
"He threatened me with my job, my SS card and my bank saying that we were going to court if I didn't pay. I sent them $200 so far and I shouldn't pay anymore. I did not receive the money and I have a bank statement to prove it. I just want this to stop."
Cashjar.com doesn't fare any better with consumers.
"I had an extreme emergency and needed money fast," said Linda of Temple Hills, Md. "I went online and found CashJar's advertisement. I applied for a $1,000 loan. CashJar loaned me the money. In haste, I read the terms but did not fully understand them. In summary, so far, CashJar has taken $1,500 out of my account. By the end of this, I will have paid $3,100.00 back on a $1,000 loan."
Going backwards in Pennsylvania?
Luckily, Linda doesn't live in Pennsylvania, as lobbyists in that state are working to overturn legislation that regulates payday loan companies, and the interest they're able to charge.
In retaliation, consumer groups fought back against a bill that would remove current guidelines for lenders. If industry lobbyists are successful and the new bill passes, it would raise admissible interest rates to 369 percent. Pennsylvania currently has an interest rate cap of 24 percent.
Many who obtain a payday loan will find themselves in deep trouble, because they borrow additional amounts of money to pay back the original loan. According to the watchdog group Center for Responsible Lending, repeated payday loans account for $3.5 billion in fees every year.
In addition, the average borrower has nine loans open per year, as many people remain in constant struggle trying to catch up with payments. This is especially difficult as most of these consumers were cash-strapped in the first place.
The average loan recipient stays in a payday loan for 212 days of any given year, according to the watch group’s findings.
And if Pennsylvania lobbyists get their way, loan companies will once again be able to charge whatever interest they want to consumers. State representatives who oppose the pending bill say it's a combination of bad politics and hidden agendas.
"There is an army of lobbyists for the payday lenders in Harrisburg," said attorney Kerry Smith at a speaking engagement in Philadelphia.
Lance Haver, who is Philadelphia's Director of Consumer Affairs, put it a little more bluntly: "If there were a truth-in-politics-law, they'd have to say, 'We're about to pass a bill that will screw every poor person even more.'"
In 2010, Financial Service Centers of America, along with other loan companies, stormed Capitol Hill to protest the interest regulations put in place just a few years prior. Since those parameters were set by the U.S. government, lenders have been fighting vigorously to have them removed.
Payday lenders have also starting lending online, in hopes that interest laws would no longer apply. But the Pennsylvania Supreme Court ruled recently that the regulations are still in effect, whether money is borrowed from a physical location or online.
Consumers should really do their best to avoid using payday loan companies. But if you do have to use one, it should only be as a rock-bottom-last-resort.
One should always keep in mind that loan companies don't have your best interest in mind, and the last thing they want to do is get you out of a bad financial situation.
Remember, these companies wouldn't lend you money if they didn't see a large profit for themselves down the road. So be very careful.
Most people have needed some cash loaned to them at some point in their life, and going to a family member, close friend or a bank to get financial assista...