As the practice of charging interest over the maximum allowed by law is known as “usury,” the term “loan-sharking” is synonymous. Loan-sharking is a step above phrases like “pay the advance,” “check advance,” “deferred deposit,” and “payday loan.” Do not let yourself be fooled into participating in a legal, multibillion-dollar industry.
I recall that we didn’t have much money when I was a young soldier in Korea many years ago. Before the end of the month, gambling and “other pastimes” drained our meager savings, but “friendly,” black-market loan sharks offering loans at interest rates of up to 50% were never far away. On payday, the Korean equivalent of Don Corleone was not more than five feet away from the cash machine.
Neither its name nor its position has altered much over the years. Still, some who have trouble making ends meet fall victim to payday or cash advance lenders. Payday is still the center of the repayment process. Still, the prices are astronomical. What’s different now is that it’s legal and the “APR” reaches 350%, and the clientele is no longer limited to those in the armed forces. Thousands of hardworking people are becoming easy prey since they have difficulty making ends meet. Countless people struggle to make ends meet due to working minimum wage jobs, mounting medical bills, gambling problems, or other dire circumstances. But they all keep a checking account and save their pay stubs.
The consumer who has worked hard but is nonetheless weighed down by debt may be fooled by a seemingly harmless business such as Pay Advance. Is this a chance, or what? If you’re the lender. An actual situation was pasted below from an e-mail I received; enjoy!
For $3,000, I am behind on payments to nine different check advance companies. I have roughly 15 bounced checks from previous attempts to repay check advance firms. The sum of all the overdue checks and fees is around $1500. People are constantly calling me, as well as my employer. They all want their money within ten days, or they’ll send it to the county courts office and won’t accept partial payments, they say.
One of our economy’s most rapidly expanding sectors is the proliferation of check advance businesses nationwide. To reinvest in their first pay advance business, the previous proprietors of Blockbuster Videos liquidated their thriving organization. The event occurred three years ago. Now, only one multinational corporation has over a thousand locations worldwide. Such exponential expansion would not be possible without the promise of enormous profits. An annual percentage rate of 200%, 300%, or 400% represents a considerable opportunity for gain.
A different e-mail, however, linked to a piece published in a Memphis newspaper. The article’s author contacted one of the check advance company’s owners or managers to inquire about the company’s excessive costs ($20 for seven days on $300). “It did not matter what the annual rate was if you only needed the loan for a short period,” the payday loan entrepreneur explained.
What do you think? Is the owner right? We’ve already talked about how common it is to recycle old methods. I’m willing to bet that I can successfully argue for an APR of 360% if I repay one loan, then immediately apply for another, and so on.
However, the interest rate does not work like an APR.
It’s some charge. According to Auburn University’s Glossary of Political Economy Terms, interest is “the price(s) of obtaining the temporary use of money that one borrows from someone else who owns it, normally expressed as a percentage of the amount borrowed per year.” On the other hand, “a charge for services rendered” is what we mean when we say “fee.”
Thus, it is not an “excessive APR” because it is a fee, and any comparison to usury is like comparing apples and oranges. Therefore, it cannot be considered loan sharking. DUH. Where have I gone wrong? However, I have one more tidbit to share. Since advance payment is not a loan, debt collectors cannot demand partial repayment. The local district attorney’s office can be forced to serve as a collection agency for advance check businesses due to non-sufficient fund (NSF) legislation.
It’s no surprise that these enterprises are flourishing. They are in an ideal position.
Loan sharking in a legal sense, according to the Consumer Federation of America.
Payday loans are single-payment, short-term loans based on personal checks kept for future deposit or electronic access to personal checking accounts, as defined by the Consumer Federation of America. Typically, a customer would borrow $100 cash by writing a check for $117.65, which is payable on their next payday or within 14 days. The $17.65 finance charge is equivalent to an APR of 459%.
“commonly involve modest sums of money borrowed for a brief period at exorbitant interest rates. A client is typically a low-income person who cannot access traditional forms of credit… Since many borrowers lack the money necessary to pay off the loan and cover the check after the loan period, they are forced to extend the loan repeatedly. The borrower in the above example [charged $15 for a $100 loan for two weeks] would have to pay an additional $15 every time the loan was extended without obtaining more funds. Estimated yearly percentage rates across the country range from 700% to 2,000%, with the effective annual interest rate varying based on the fee and the number of times the borrower pays an additional fee to extend the loan.
Some alternatives to Payday Loans are those suggested by the FTC and the Consumer Federation of America (among others).
a. Try not to waste money on anything, including mundane necessities.
b. Save up money, even if only a little at a time, so you don’t have to take out loans to cover unforeseen costs or other obligations.
The charge associated with a standard $300 payday loan can be put into an emergency fund by saving the money for six months.
2. Determine whether or not your bank account comes with overdraft protection. If you routinely spend all or almost all of the money in your checking (or savings) version, and if you make a mistake in your account’s ledger or records, overdraft protection can protect you from additional damage to your credit. Learn the details of your overdraft policy.
Third, see a local consumer credit counseling program if you’re having trouble creating a budget or working out a repayment plan with your creditors. Credit counseling is available from non-profit organizations in every single U.S. state. All of these options cost very little if anything at all. Credit counseling services may be available at no cost or a moderate cost through your workplace, credit union, or local housing authority.
If you need a payday loan to get by until your next paycheck, only borrow the amount that will allow you to do just that.
5. Request an extension from your debtors. Find out if you will be charged a late fee, extra finance charges, or a higher interest rate for using this service.
Try to get a cash advance on a credit card or a small loan from a credit union or a small loan company with the lowest interest rate possible.
Consider borrowing from friends and family or getting an advance from your company when a financial emergency comes. Make a written promise to pay them back by a specific date to show your good faith.
Eight, small company loans may be available from some non-profits in your area.
9. Request an extension on your utility payments.
Understand that I am not arguing that you shouldn’t pay what is rightfully owed to you. The following, however, are suggestions made to me by people who have also fallen into the trap of payday loans. You can use them to make intelligent choices.
It got to the point where I couldn’t afford to pay them anymore. I just called and informed them. They wanted to know what I could send and specified a sum. One of them encouraged me to “just call” if I was having trouble making a payment.
Second, “postdated checks are typically not included in criminal bad-check laws.” Additionally, these may be eliminated through the bankruptcy process. Since these checks are postdated, the lender already knows they are worthless when you write them. For this reason, instead of “bad checks,” the common law of debt applies. Therefore, legally, not paying a payday lender is the same as not paying any lender.
Thirdly: “I would close the bank account. Start a new one and send them payments as money orders. This short-term solution could help you catch up on your mortgage payments. I hope you don’t fall behind so you can pay the Check for Cash, folks.
Fourth, “Stop payment on the outstanding checks they already have before closing the account to de-fuse the possibility of getting stuck in the ChexSystem mess.”
5. “I once got into a sticky situation with a payday loan. I did (2) put a stop payment on the checks and (3) work out a payment plan with the business. They weren’t thrilled, but at least I was making a dent in the bill and avoiding further interest or fees. One of the businesses had already written it off to a collection agency, but they agreed to continue receiving $25 monthly despite this. Then I wouldn’t have to worry about paying their fees before putting my money toward my debts. It’s not a panacea, but it will get you out of the vicious cycle of living paycheck to paycheck. To that end, I offer my best wishes. Also, I used money orders for the transactions.”
Look into the regulations that apply to Check Into Cash in your area. I know that in Florida, you can inform the lender that you cannot cash the check. You’re given 90 days to cash the money, but only if you enroll in credit counseling. Perhaps a similar statute exists in your home state.
You can legally show that you contacted the payday loan providers by sending a letter to them via certified mail. I informed them that I could not continue making payments due to changing my financial situation. My proposed payment schedule was reasonable and took into account their interest costs. Some initially balked but ultimately accepted my terms; those who did not even receive interest.
Stop giving them money!” To my knowledge, all states have passed laws making it illegal to prosecute you. Even if they decide to pursue a civil judgment against you (they won’t), you’ll be partially protected if you’ve already sent the letter letting them know they can’t pay and stopped payment on the check. Then, pay what YOU can manage…Please don’t give in to their demands. After you’ve caught up on your rent or mortgage payment, utility bill, and phone bill, make extra payments to the payday lending companies until you’ve paid them off.
9 “The best thing to do is notify the payday lender as soon as you find out that you cannot pay them (due to your company changing paydays or other reasons). Having paperwork or a reference (such as your employer or the payroll firm) to back up your tale is helpful. Payday loan companies usually understand payment delays and would instead be paid late than not at all. Consider again that you are the lender, and the brother-in-law who owes you money has come to you, explaining that his baby has become ill. You’re more likely to believe him if he presents you with a medical bill incurred after you loaned him the money, right?
Checks are “a draft drawn on a bank and payable on demand,” as stated in Section 3-104(2)(b) of the UCC. Since a postdated check is not payable on demand, it cannot be used to meet this requirement. Therefore, most states have concluded that a postdated check does not involve present fraud and does not fall under the purview of bad check legislation.
The following statement by the Consumer Federation of America provides crucial context for understanding the answer to this issue.
Cash advance loans should be controlled through state minor loan laws that require licensing or registration with state banking authorities if they are not outright banned. The Truth in Lending Act mandates that all disclosures be accurate.
The effective yearly interest rate must be capped absolutely, 1. Limiting the size of these loans, establishing a minimum term for repayment, requiring written contracts, prohibiting rollovers from one loan to another, and making it illegal for lenders to threaten borrowers with bad check laws if late are all things the state should do.
Second, cash advance loans on checks should be considered unsecured debt for bankruptcy purposes, and lenders should not be able to file criminal charges for nonpayment. To keep tabs on the business, states should compile industry-wide statistics.
Third, in states that forbid payday loans from being made by state check cashiers or state-chartered financial institutions, the federal government should address any loopholes that allow national banks to make such loans. The Comptroller needs to ensure banks follow consumer laws in the states where they operate.
Mike, the author of this piece, also provides a free debt removal mini-course via e-mail, which may interest readers. Visit [http://www.learncreditmanagement.com/debt-assistance/]Debt Free In 7.5 Years to get started now.
Mike has spent over a decade as an online writer and guide on credit and debt management. In the past year, his site’s traffic has doubled to over 500,000 monthly average views, earning him Forbes’ Best Of Net title from 2000–2005.
He has also provided debt-reduction workshops for local businesses and universities for nine years. Numerous articles have cited him, and he’s been featured on the radio.
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