What Was That Interest Rate?
You’ve probably seen the ads on TV. You know; the ones with a recognizable spokesperson imploring you to call the 800 number and have cash in your account almost instantly.
These
loans are commonly known as Payday Loans and although they charge exorbitant
interest rates, folks desperate for a short-term loan seem to disregard that
detail. The theory is to owe the money for only a few days, so the interest
won’t amount to much.
If you
think your 29.99 percent credit card rate is high, try 149 percent on for
size. Think that’s outrageous? That’s
actually the lowest of the rates I’ve seen on Payday Loans. The highest? 476.09
percent. No, that’s not a misprint. I
guess 476 percent wasn’t quite enough so they had to add another .09 percent.
Is this
legal, you may ask?
Usury, the
illegal action or practice of lending money at unreasonably high rates of
interest, is not allowed by corporations or individuals, but if you’re a sovereign
nation, it seems you’re immune to usury laws.
I recently
had the opportunity to review several of these loans, so what I’m stating here
are factual examples, hard though they may be to believe. For instance, one
loan of $1,000 carried a $500 origination fee. So from the instant the borrower
received $1,000 he owed $1,500 on which he was being charged 149 percent for an
APR of over 200 percent. Another loan of $320 carried a $120 monthly service
fee plus an interest rate of more than 400 percent. In addition, these loans
carry stiff penalties if not paid back on time.
Our
government recently limited Payday Loan interest rates for military personnel.
They still allow advertising right on base, but they’ve capped the interest
rate at 36 percent. I know I’m on a soapbox here, but that’s what we consider
being kind to our troops? And if it’s unfair to military personnel, why isn’t
it unfair to everyone?
I’ve come
to call these lenders “predator creditors” because of their focus on
impoverished, young, naive individuals. Aside from interest like a rocket, the
payments, even on “current” loans, are far out of whack compared to other
loans.
I recently
reviewed four loans totaling $2,700 with monthly payments required of more than
$400 with nearly $200 in “service fees.” That means that the first $200 goes
toward fees, the following $200 to those enormous interest rates, and anything
left would be paying down principal.
Although
these loans typically draft directly from a checking account, when borrowers
realize they’ve bitten off more than they can chew, they often close the
account assuming they will evade the lender. As you would imagine, lenders
making this type of loan may be more than a little aggressive in collections.
I’m sure
there are individuals who have taken these loans, paid them back on time, and
not regretted the added expense, but my message here is simple: if you or
anyone you know is considering one of these loans, please STOP! Re-assess, ask the opinion of someone you
trust about finances, consider alternative plans, and see this as a sign that
your finances are in distress and that you need to effect a change going
forward.
One
closing thought. Whenever I mention these loans, the first question is always,
“Who would take a loan like that?” The answer is people in all sorts of
circumstances who believe they’ll only owe for a few days.
I think
the more important question is, “Who would write a loan like this?”
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