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Payday lending (sometimes called cash advance) - the practice of using a check dated in the future as collateral for a short-term loan - is generally marketed as quick cash for a short-term emergency. The borrowers need only an income (from a job or government benefits) and a bank account to qualify.
Here is a typical payday lending scenario:
A borrower writes a $300 check dated two weeks in the future to a payday loan company, and takes home $255 in cash after the $45 in fees charged [$15 per $100 borrowed]. In two weeks, the loan is due in full, but most borrowers cannot afford to pay the loan back and still make it to the next payday. To avoid default, they pay another $45 to keep the same loan outstanding, or they pay the full $300 back, but immediately take out another payday loan, with another $45 fee.
In either case, the borrower is paying $45 every two weeks to float a $255 advance - while never paying down the original amount of the principal. The borrower is stuck in a "debt trap" - paying new fees every two weeks just to keep an existing loan (or more) outstanding.
Lisa Engelkins, a single mother from Winston-Salem, NC, paid $1,254 in fees to extend a $255 loan 35 times. Engelkins cautions, "As soon as you get your first loan, you are trapped unless you... have the 300 extra dollars in the next two weeks." Annual percentage rates on average exceed 400% and trapped payday borrowers are often threatened with legal action and intimidating collection tactics.
Reprinted with kind permission of the Center for Responsible Lending, April 2004.
Source: Center for Responsible Lending
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