Peer Review Findings on Payday Loans Surprise Many
There are always two sides to a story. Payday loans have taken a beating in the media. Companies offering payday loans are painted as moneygrubbers and thieves. As is true in any business, there are unscrupulous personnel, but not everyone is to blame. A recent peer study on payday lending paints a different picture to what the media is telling.
A panel of experts delved into payday lending to see what is and what isn’t true. Those findings were reported in American Banker. Three studies were performed, and the findings are surprising.
Payday Lenders Are Not Raking in Huge Amounts of Money
First, interest rates are high when you break it down into a yearly picture of the APR. In fact, the study found that the average APR for payday loans comes in at 391 percent. However, that money is not making payday lenders rich. In fact, the findings showed the opposite is true. Payday loan companies are not making any more money than a bank or credit union.
While banks have much lower interest rates, banks deal in loan amounts of thousands, tens of thousands, or even hundreds of thousands. Payday loans are often capped at $500. Even with the higher interest rates, payday lenders are barely breaking even. Of those profits, payday loan companies often end up losing money to consumers who default on their loan. Payday loans are unsecured and therefore there is no guarantee the payday lender will ever see their money again.
Payday Loan Fees Are No Worse Than Bank Fees for Bounced Checks and Overdrafts
When you look at the fees and interest charged in a payday loan, it often comes to less than a bank or credit union’s overdraft or returned check fees. According to Bankrate, the average overdraft fee in 2015 is just over $33. Moreover, banks often take out the money to cover a check, charge the overdraft fee, and then go to process the next check. If you have three checks that need overdraft coverage, you’ll pay three times the overdraft fee of $33. That’s $99 in fees you’ve accrued. In addition, you may face excessive withdrawal fees of $7 or more if more than six withdrawals take place in one month. You also have returned item fees that could be $25 or more per returned check.
Truth About Repayment
The media also likes to play up that people who borrow money through a payday loan often roll that loan into a new one dozens of times. The findings revealed that the majority of borrowers pay off the loan when it is due, only 2 out of 10 let the loan roll over more than six times. Payday loan companies that offer loan counseling found that 6 out of 10 borrowers could accurately state when their loan would be paid off.
Payday loans are beneficial to those who need money to cover bills until their next paycheck. Consumer Financial Protection Bureau actions aim to cap payday loan rates at 36 percent. If this happens, payday lenders will have to drastically tighten their requirements or shut their doors completely. For those who do not qualify for a traditional bank loan or do not have the time to wait for a loan to be processed, this could end up being devastating.