A recent article in the Columbia Chronicle just goes to show how misunderstood payday loans really are. Another example of biased journalism, the author expresses the worn out opinions that are so common among supposed ‘consumer advocates.’
So let’s take a look at some of these myths surrounding payday loans and debunk them, shall we? First, there are huge fees and rates for payday loans.
Paying $15 for every $100 borrowed is not unreasonable. That’s 15% of the amount borrowed paid in fees. Try over drafting from your checking account by only $20. You will be slapped with a $35 overdraft fee. By the way, $35 is about 175% of $20. Who’s charging the unreasonable rates?
Looking at 400% APR is unfair for payday loans. Loans are meant to be out for only one pay period. That’s a maximum of one month. At 400% APR, a one month loan would cost about 33% in interest when paid back. Most pay periods are two weeks, so that’s only 16.5% in interest. Unreasonable?
Myth number two: payday loans trap people in a cycle of debt. The idea is that people take out another payday loan to pay off the first one. When that one is due, they get another payday loan to pay it off. The cycle of debt continues.
Payday loans are not designed to put anyone into a cycle of debt. They are designed to be paid back with your next paycheck. If you borrow too much, is it the fault of the payday lender or the borrower? If you can’t pay back your loan with your paycheck, you should have borrowed less. Stupid is as stupid does.
That’s not to mention that for every person caught in this supposed trap, there are dozens of borrowers who use payday loans responsibly who are not caught in the trap. Never hear about them in the news…
Myth number three: payday lenders target the poor,elderly and minorities. Payday lenders set up shop in poorer areas,thus enticing those who can’t afford payday loans to use them and get caught into the debt cycle.
Let me ask a question- in what type of neighborhood are you more likely to see a Ferrari dealership? What type of people are likely to get credit card offers in the mail? What type of citizens are targeted by advertising from The Bellagio?
Anyone in marketing knows that each business and industry has a target market. Do we get mad when only people with good credit are offered credit cards? Are we mad at Ferrari dealerships targeting the rich? Of course not, that would be silly. Yet we are mad at payday lenders for trying to sell their products to those who need them?
Why would anyone with $10,000 in a savings account go borrow $400 from a payday lender? If they needed money, they would just take what they needed from their savings. Most wealthy people have a lot of money in reserves and savings that they can use in an emergency.
But who wouldn’t have money in an emergency? The people living paycheck to paycheck, or in other words, poorer people. Basically, anyone without an emergency fund. Those people tend to be lower or lower-middle class. Minorities and migrant workers tend to fall into that category.
The target market for payday loans is what it is. That’s just who needs the product. It would be stupid to market payday loans to Bill Gates or Warren Buffet, don’t you think?
Final myth, and I quote: “The way the product is set up, people can’t pay off this loan in a very short amount of time.” Spoken like someone with absolutely no idea how the product is set up.
There is a reason they are called PAYDAY loans….you pay them back on your next payday. You are essentially paying a lender to give you a portion of your paycheck early. Fortunately, you don’t have to pay for that service until after you have been paid.
I don’t know of any lender who allows someone to borrow more than 50% of their monthly income. That way, even with fees included, the borrower is guaranteed to have enough in their next paycheck to pay back the loan. That’s how they are set up, to be paid back in a short period of time.
Spreading lies and deceit is bad politics. It should say something to the public that payday loan critics are using “facts” that are based on myths to argue against payday loans. Lenders are combating the lies with the truth, but legislatures just keep on trying to put lenders out of business.
We implore all lawmakers to examine how many people are helped by payday loans. Anything can be dangerous when not used properly, so don’t use irresponsible borrowers as an example of a typical user of payday loans.
