Payday Loans

What is the most expensive legal form of credit available to you?

If your answer is a secured credit card at 24% APR, you are off by a mile. Try getting a payday loan.

Payday loans, also known as deferred presentment, are currently available in 20 states plus the District of Columbia. They are short-term loans, generally 7 to 14 days, against a post-dated check. In Arizona, this loan against the paycheck you haven't yet earned carries a 15% fee. On the average payday loan of $300 for eight days, this 15% fee equates to an APR of 459%!

Check cashing and payday loan shops are popping up like mushrooms in plaza storefronts around my downtown neighborhood in Phoenix, Arizona. Signs announcing "Cash King coming soon" appear at 7th Street and McDowell next to the Starbucks and at Central and Thomas between the florist and the dry cleaner.

Will people take an advance on next week's pay to buy a Mocha Frappuccino, I wonder? Will they borrow to retrieve their dry cleaning or to buy flowers for their girlfriend? As Cash King joins Cash One, CheckMate, EZLoans, Money Mart, --there are more than 250 shops in the state of Arizona with one-third in the City of Phoenix--I have to wonder. Is there a need for payday loans?

According to the payday loan propaganda, everybody needs a payday loan. It's a quick, no hassle way for consumers to secure small, emergency loans, with little or no red tape. They claim payday loans serve an under-served market because neither consumer finance companies nor banks are interested in originating $100 to $500 non-secured loans.

Yes. A payday loan is quick and relatively hassle-free. You write a check to the payday loan people for the loan amount plus fees. (In Arizona the loan can be from $50 to $500 and the maximum fee is 15% of the loan amount.) You postdate the check to the date of your next payday. They give you cash for the loan amount. You agree to either bring in the cash in exchange for your check or allow them to automatically debit your bank account on your next pay day.

There are several problems with this arrangement.

First, the fee you pay for the use of this money is exorbitantly high. Think of it this way: by borrowing your pay in advance, you are settling for a 15% cut in pay.
Second, if you can't make it through to the next payday without a loan, and you're already spending next week's pay, how will you ever make it through next week without another loan? This can be a vicious, and very expensive, cycle.
Thirdly, it is considered fraud to knowingly write a bad check in many states (including Arizona). This means that on the off chance that you don't reclaim your check on the agreed date, they will deposit it anyway. "Bad check" laws in many states (including Arizona) allow them to take you to civil court for three times the amount of the check plus court fees.
And, if your check bounces, they will charge you an NSF fee of up to $30. Don't forget that our own bank will also charge you an NSF fee.
Can it get any more expensive? Unfortunately, it can. They can also prosecute you for fraud, if they are so inclined.
One Web site touting the advantages of opening a loan shop claims an annual return of 805% for investors! Their best estimates of the average returns possible for one payday loan store:

Monthly volume for 1 store: 575 checks
Average loan: $300
Average fee: $15 per $100 advanced
Total monthly loan volume: $172,500 ($300 X 575)
Total monthly fee income of one payday loan store: $25,875 ($172,500 X 15%)