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John Leland from the New York Times is again discussing debt (he’s the one who interviewed me back in February). This time, he’s discussing payday loans and a new thing out there called non-profit payday loans.
Payday loans are notorious for charging huge amounts of interest in the neighborhood of 500%+. Way back when, I almost worked at a payday loan place and while I didn’t know too much back then about finance, I knew that the rates they charged were very high. Needless to say, I got a call back but I told them I wasn’t interested. Now that I know more about finance, I’m glad I did that.
Non-profit payday loans (sometimes called alternate payday loans) sound a little better. They are non-profit, right? But are they really that much better than payday loans?
“…alternative payday loans have also drawn criticism from some consumer advocates, who say the programs are too similar to for-profit payday loans, especially when they call for the principal to be repaid in two weeks. At GoodMoney, for example, borrowers pay $9.90 for every $100 they borrow, which translates to an annual rate of 252 percent.”
[Via New York Times.com]
252%!!!
I’ll give the non-profit payday loans one thing…compared to payday loans they are technically better since they have a lower interest rate and it appears that some organizations will work with you to try to help you with your debt. But that isn’t enough to help people avoid the debt traps that payday loans (of any type) create. To me, they will remain a prime example of predatory lending for they target those who have a need for money and little knowledge about interest rates.
I’ve read stories online from those who have been trapped by payday loans. I’ve even tried to get an interview once from someone that I’ve talked to, but it didn’t work out. If anyone reading would like to share their story about payday loans, I’d love to hear it and share it on here.
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Posted: August 29th, 2007 at 2:15 pm
[…] from Blogging Away Debt wrote recently about Non-profit payday loans. They do offer better ( though still extremely […]
Posted: August 29th, 2007 at 3:02 pm
I don’t know who would ever even consider a predatory Pay Day Loan…it’s a loan shark loan in my opinion and they’ll want it back in spades.
Shady! I can’t believe certain nameless tax preparation firms engaged in similar tax refund loans as well…Stay away!
-Raymond (MONEY BLUE BOOK>
Posted: August 29th, 2007 at 5:09 pm
So, the Goodwill offers payday loans at a break even point (or even at a loss) by charging $9.90 per $100. Payday lenders typically charge $15 per $100. These are two week loans, not annual loans, so applying an annual rate doesn’t make sense.
I find it facinating that a non profit is offering a product for no profit and you still cricizing it for being too expensive.
Either way, anyone who has ever paid a bill late or bounced a check understand that the fees for payday loans are cheaper than that.
Posted: August 29th, 2007 at 8:31 pm
I don’t understand. If the business is “non-profit,” why do they charge interest?
Posted: August 30th, 2007 at 8:51 am
Non-profit is a designation from the IRS and means that the organization is exempt from taxes, has a charitable mission, and is run by a board of directors (among other things). They will still try to pay for their programs by charging fees for sevices, loans, etc. and most well run organizations will turn a profit or at least break even. The difference is that this profit will pay for more programs, not make the executive director or the board members (there are no shareholders) rich.
That said, I am always shocked at how high both these rates and the microenterprise loans in developing countries rates are. Maybe I just need to see the math to get the reasoning?
Posted: August 30th, 2007 at 10:12 am
So “non-profit” is basically a label that doesn’t really limit an organization from profiting.
We use a slightly different terminology here in Sweden, that’s why I thought it sounded strange.
Posted: August 30th, 2007 at 12:52 pm
Way back in the day I used a payday loan…the experience was enough to make me swear off those things forever! They charge interest rates that would make even a loan shark cringe, and they are set up so you can never really get out of them without some hit to your finances. It took me 3 paydays to get out of that loan, because at the time I was not on a budget at all, and the bills kept coming in regardless of what I owed these people. In the end, I let a utility slide for a month just to get rid of this debt that kept growing at almost exponential rate. Not the best way to handle it, but the experience convinced me that contrary to your first commentor says, payday loans ARE evil!
Posted: August 30th, 2007 at 3:40 pm
It is my understanding that “some” Goodwill’s are now privately “owned”. That is they are not controlled by the charity - Goodwill.
Posted: August 30th, 2007 at 3:41 pm
loansharks??? No, those are the guys that make loans and hurt you when you dont payback. If its a legitimate business, that is licensed and follows the laws that regulate it….who cares. Its America. Don’t want a loan, then don’t go.
Posted: August 31st, 2007 at 5:02 pm
There is a great deal of misunderstanding and incorrect information regarding payday loans and the people who use the product, most of it coming from people who have never used or needed a payday loan. First, since a payday loan is typically for 2 weeks, and most people don’t understand how the APR is calculated, using the APR (annual percentage rate) is very misleading.
Simply put, the APR for a payday loan is presently calculated by taking the fee divided by the principle and multiplying it by the number of payment periods per year, then multiplying by 100 to get the percentage. For example, for a $200 payday loan with a fee of $30 for 14 days, the APR is calculated as follows:
30 / 200 = .15 x (365 days per year / 14 day payment period) x 100 = 391.07 % APR
Now take into account if other fees or payments were put into APR’s:
A $1.50 ATM fee on $50 instead of going to the bank the next day
1.50 / 50 = .03 x (365 days per year / 1 day payment period) x 100 = 1095% APR
A $35 late fee on a $100 credit card payment for a payment that is 7 day late
35 / 100 = .35 x (365 days per year / 7 day payment period) x 100 = 1825% APR
A $24.00 bank overdraft fee on a $25 check until the direct deposit arrives in 5 days
24 / 25 = .96 x (365 days per year / 5 day payment period) x 100 = 7008% APR
So, taking the given equation, and limiting the loan to an APR of 36% would allow for a company to charge about $1.38 per each $100 loaned. Since a non-profit company has basically said it needs to charge $9.90 per $100 and is still not completely covering costs, then there is no way any business could survive with a 36% APR cap. It is true that some people do not use payday loans responsibly, which can lead to financial trouble, but isn’t it also true with every financial product available today from credit cards to home loans? It wouldn’t be right to eliminate credit cards because some people abuse them just as it would not be right to take away the option of payday loans from the millions of people who use and rely on them.
Posted: March 6th, 2008 at 4:20 pm
I did not know they did the non profit ones. Interesting.
Posted: May 5th, 2008 at 4:19 pm
My husband should know better than to use payday lenders. He was a CEO about 40 years ago, after all. But he’s bullied me into the payday lender trap not once, but twice now. He doesn’t have a checking account, which is required, so I have to allow him to use mine. He borrows as much as they’ll let him on the basis of my Social Security check, which is the only predictable income I have. (I work from home for a reputable telemarketing company, but that paycheck varies widely.) Only a major financial windfall got us out of the trap the firwst time, but after catching up bills, an expensive automotive repair, my splurge on Christmas and his decision to buy a new purebred dog, plus living expenses that are higher than our income right now, he doesn’t feel we have a choice. If I don’t go along, I get no peace. Only God’s Providence got me out of this trap the first time. I can only pray He’ll have mercy on me the second time around, and help keep us out of the payday lending trap permanently next time.