Sunday, September 14, 2008

Payday Loan Pitfalls

Attorney Carl Starrett was recently invited to appear on KUSI television's Good Morning San Diego show to discuss the risks of payday loans:

Payday loans are short-term loans where a borrower writes a postdated check to a lender who provides immediate cash, and the check is deposited on the borrower’s next payday. According to the California Department of Corporations, 1.4 million Californians took out payday loans totaling $2.5 billion. While California law limits the cost of these transactions to 15% of the face value of the check, the short length of these transactions means that the annual percentage rate on these loans often exceeds 400%.

Members of the military are often particularly vulnerable to payday loan predators because they have steady income from the government and often with little to spare. At deployment time, members of the military are often hit with unexpected expenses.

Payday loans and other types of short term loans should be used sparingly, if at all. Before applying for a payday loan, consider more traditional and less expensive lenders such as a credit union or other local financial institution.

If you have been the victim of a predatory payday loan or simply see no way out of your financial struggles, consider contacting a member of the National Association of Consumer Bankruptcy Attorneys for further assistance. If you are in San Diego County, please contact us for a free consultation.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.


Anonymous said...

As a representative of the payday lending industry, it amazes me every time I read articles/blogs like this claiming that payday loans are outrageous because they charge a 391% APR. These are not annual loans, they are two week, short-term loans and their rates are reflective of this. They are not meant to be stretched out over a year, especially since the average loan is $300. A 15% fee on a $100 payday loan is completely reasonable and, in fact, quite favorable to many consumer alternatives. Here are their respective APR’s when they are expressed in two-week terms: a $100 bounced check with $54.87 NSF/merchant fee is 1431% APR; a $100 credit card balance with $37 late fee is 965% APR; a $100 utility bill with $46.16 late/reconnect fees is 1203% APR; a $29 overdraft protection fee on $100 is 755%.

The 36% rate cap makes this produce unfeasible and, as a result, is no longer offered to the military. You simply cannot offer an annual rate, which is similar to other annual credit options, on a product that is based on a two-week timeframe. At a 36% APR, the total fee charged on a $100, two-week advance would be $1.38. Payday advance lenders could not cover the cost of originating a loan, let alone meeting employee payroll and benefits and other fixed business expenses. This just eliminates an affordable credit choice to consumers, when they should be given as many choices as possible. Competition in this industry will only benefit consumers by driving prices down.

Carl Starrett said...

The logic of your comment is rather fuzzy: "We really aren't as bad credit card companies or other creditors, therefore you are being unfair to us."

A predatory loan is still a predatory loan. Nearly 10% of the people who use payday loans obtain at least 1 payday loan a month and often more. Nearly 83% of payday loans in California are made to repeat customers. It is like a narcotic to people with serious money problems.

As I stated in the interview, payday loans should be used only as a last resort and you should only borrow as much as you can afford to pay with the next paycheck. Otherwise, it can start a vicious downward spiral of debt.

In my bankruptcy practice, many people have no idea how much money they spend. People need to look at the reason why they need a short term loan. Is it because of poor budgeting and not saving any of their income? Will the payday loan industry step to help educated consumers to avoid debt problems?

To borrow a phrase from Shakespeare, the payday loan industry doth protest too much.

Carl Starrett said...

I suspect that the previous comment was left by another person from the payday loan industry. The link that the commenter posted takes you to a check cashing website.

If you are constantly taking out payday loans, didn't ever occur to you that you are spending too much money? Where does it end? How often are you going to pay 400% for short term loans? That isn't much different that people who come to see me that keep getting by with low balance transfer offers on credit cards.

Paydays are not a solution. They are a temporary fix with very scary consequences.

Anonymous said...

Mr. Starrett I would disagree with the predatory label that you place on payday loans. Predatory implies that the customer is not fully informed. The fees for a payday loan are in poster format. There is no way a customer would not understand the fee they are paying or the terms. The same cannot be said for bank fees or credit card fees.

I do agree with you on financial education. This applies to every financial product. People need to take responsibility for their financial health which is no different than their physical health, etc. With the savings rate in America at the lowest point since the Great Depression, we need to educate now. We cannot continue to blame others for our own actions.

Carl Starrett said...

I must have hit a nerve with this article, because I rarely get comments on my blog entries. So far, the comments have been from anonymous posters and the first two are clearly from industry shills.

To claim that a payday loan is not predatory just because customers are "fully informed" is absurd. For many people in the working and lower-middle class, payday loans create a cycle of dependency that is often hard to break. A recent study by the California Department of Corporations supports this conclusion:

I love this quote from Wikipedia about payday loans: "The Defense Department called payday lending practices "predatory", and military officers cited concerns that payday lending ruined low-paid enlisted men and women's finances, jeopardized their security clearances, and even interfered with deployment schedules to Iraq." While it is true that payday loans are strictly voluntary, they are also very easy obtain and the borrower is not necessarily “fully informed” of the financial risks by a poster on a wall.

Payday loans are like alcohol. In small amounts, the harm is minimal. In large amounts, the harm might be irreparable.

Latrell said...

There was a time (when I was newly divorced) that I found myself in a situation where I went from two full incomes to 0 income over night! I was starting a new job and knew I would get my first paycheck in 3 weeks. However when you have young children and have just moved out on your own food is not a pleasure its a necessity. Instead of calling my father and asking for help I sold every thing I owned at a pawn shop and didnt get enough money to put gas in the car let alone buy 3 weeks worth of food so I opted for a pay day loan based on my previous pay stubs and banking information. thats all I needed was my last 2 stubs which where dated recently but no one ask me of I still worked at this place (which I didnt) and a bank statement.

No I didnt read the poster that was hanging 2 inches from my head when I signed the loan papers. The person giving me the loan did the typical sales person nonsense. They handed me a pen, then with her pen she pointed and talked real fast the only thing she slowed down enough for was "initial here and here and here" all the rest was a fast paced blur!

That first time loan spiraled into months of loans until income tax time rolled around and I could finally get out of the whole loan cycle.

Because I had borrowed away my pay check I had to have more loans to pay the bills.

I would call them predatory loan sharks because I have seen first hand how they swiftly get your initials and hand you money and honestly it went so fast I couldn't have read the poster if I wanted to!

David Leibowitz said...

In my service as a bankruptcy trustee and in my practice as a bankruptcy attorney, I frequently find that payday loans, along with their "cousin" the "car title loans" are the desperate last step people take to try to stay afloat financially. When the interest rate overwhelms the ability of the debtor to pay from one payday to another, the loan gets "rolled" into another loan which is impossible to pay. And then, the borrower gives a post-dated check to secure payment. That post-dated check bounces and leads to threats of criminal prosecution.

Payday loans are the road to financial disaster for the overwhelming number of consumers who are unfortunate enough to need them.

Anonymous said...

I find it interesting that all the comparisons made by the "representative of the pay day lending industry" compares his industry's rates to defaulting on other types of short term lenders. The difference is when a person charges on a credit card with 20% interest and does everything right by paying on time, he is charged 20%. A pay day client gets charged 391% interest even when doing everything right.

Carl Starrett said...

Comments on this blog entry are moderated. If you are in the payday loan industry, your comment will be rejected if you attempted to post a link to your own website.

Anonymous said...

Carl's statement on payday loan is true that this a short term loan. Most of them get trapped themselves in Payday loans without knowing what it is?. It has to be paid within next payday, then the pressure won't be felt. The consumer of this loan should make lots of research on payday loans as well as on the companies offering it.These payday loans has to be used for emergency purposes and incase where one can make huge profit out of it.

Rose said...

I find it ridiculous that someone could go into a payday loan place and 'not know what they are getting into'. Give me a break. If you get a hundred dollars in cash, you write a check for $115. That's a $15 dollar charge on a hundred dollar loan. You don't need to understand annual percentage rates to understand this simple exchange. And if you don't like it you can walk away.

I am not saying that there aren't people with financial problems who get stuck in a cycle of payday loans, and in fact I have been there myself. But the payday loan industry is just a symptom of a financially stressed economy, and a society that sucks at managing money. It is not the cause of the problem. I think this is an important distinction that needs to be made. And not holding banks and credit card companies similarly responsible for their share of the financial woes experienced by millions of people is folly.

I might agree with Mr. Starrett if he were offering more comprehensive solutions (besides education, which I can tell you isn't enough); instead he seems simply to be scape-goating a business that many people depend on. Lastly, not allowing members of the payday loan industry to post is creepy. Why not allow everyone who has something to say be heard, as long as they are not trying to advertise?

Carl Starrett said...

Rose, I moderate all comments on my blog to avoid spam and other problems. I've rejected perhaps a dozen comments from payday loan industry schills who simply wanted to post a link to their websites. If someone has as comment and is not promoting their own services the comment goes through. As you can see, your comment made it through.

I'm not saying all payday loan borrowers, but the payday loan industry is predatory and abusive. And I do offer people solutions. It is called bankruptcy and a fresh start. Part of that includes mandatory credit counseling and financial management classes required by federal law.

Payday Loan Immediately said...

Payday loans are the road to financial disaster for the overwhelming number of consumers who are unfortunate enough to need them.

Gene Lender said...

Very interesting interview. She knows the metter it's obvious.
I can't agree with you Carl about "payday loan industry is predatory and abusive". Everybody makes their choice. We can call all products and services predatory but all of them are necessary for people. So let people deсide what them do and what don't.
Thank you!

payday loan said...

Do everything you can to get the payday loan paid off as soon as possible. You might need to sell somethings on ebay, hold a garage sale, even skip a payment on another debt...
Yeah -- I'll blog about that, too, since it's a topic I often talk about but have never written about. Hopefully I'll have something in the next week or so.

L said...

Hi I am in NJ and after my divorce I was forced to go Bankrupt. I took out several Payday Loans and got caught in the trap of getting one to pay another and never making enough money to pay anything. I ended up closing my bank accounts. Its been a year since my last loan and now I am getting calls to pay them. I also recently found out that they are illegal in my state which I was not aware of at the time of taking the loans. Do the payday companies have jurisdiction to collect on my debt since they were illegal in the first place. How do I get out of this trap?

Richard Hughes said...

I can certainly see why people would call the payday loan industry 'predatory', but I can also see why they are not. I think as long as you are responsible and don't borrow beyond your means you should be ok. I know people who have used Payday loan companies and they have not experienced any problems.

As far as the person who said that they didn't have time to read the terms and conditions, I think that's actually quite short sighted. If you got into trouble with a payday loan company then it's your fault for not being fully aware of what you were getting yourself into. Saying that you didn't have time to check is not really a good enough excuse.

Tony Loans said...

Like most forms of borrowing, there is a space in the marketplace for payday loans. Used responsibly and for emergencies as designed, they are extremely helpful to many people. Keeping predatory lenders out of the payday loan marketplace and educating consumers about using payday loans appropriately are more effective than legislation imo.