Home

Personal Finance: Payday loan vultures circle over festivities

22.05.12

The holidays can be signally stressful for those on a tight budget. For someone living check to check, it is tempting to over borrowing to finance a few gifts or to cover additional expenses. Many of us think of creditation cards as the obvious solution, as long as we pay off the balance immediately.

But a certain segment of the working residents without access to retail credit will be enticed to consider a pernicious alternative: payday loans.

Sometimes referred to as probe cashing services or cash advance stores, payday lenders cater phenomenally expensive short-term loans. There are an estimated 20,000 loan stores in the Common States, plus a growing number of online operations competing for the notice of the less sophisticated and most vulnerable members of the working poor. According to an industry analyst, payday lenders made over $40 billion in loans and reaped $7.4 billion in gross income last year.

The Dodd-Frank

financial reform mandated several new regulations relating to assign cards, but notably failed to curtail the usurious practices of the check-cashing assiduity. Seventeen states (including Georgia) have outlawed these businesses altogether, but regrettably Tennessee is not one of them.

Tennessee and several other states have constrained the most obscene practices of these entities by restricting the number of loans that can be made to an individual, capping the extremity loan amount, and limiting the effective interest rate (albeit at still penury-inducing levels).

Remarkably, at least 30 of these lenders are owned by Indian tribes and are therefore exempt from stately laws regulating the industry.

The folly of a payday loan can be seen in the following conventional example. A borrower writes a post-dated check to the lender for $500, and receives a loan for $425, at a professed interest rate of 17.65 percent. When the loan comes due (typically in 14 days), either the borrower must compensate the loan with fees and interest, or the lender will deposit the post-dated check. In case you deliberating credit cards had high annual interest rates at 36 percent, jibe out the payday lender at an APR of 459 percent.

Furthermore, if the borrower cannot repay the loan when due, he may also become likely for bounced check charges when the lender deposits the check, and then become the target of solicitation action and potentially of civil prosecution. For this reason, payday lending is often referred to as a “straitened trap” from which a victim is hard-pressed to escape.

Tennessee has the unsavory excellence of being one of the birthplaces of payday lending. The business is extremely profitable and has so far been successful at fending off efforts to lessen the industry under the usury laws to which legitimate lenders are subject.

For someone considering a payday loan to pick up a few Christmas gifts, or to pay a span of bills during the holiday season, take this advice: Don’t. Alongside furniture rent-to-own and title assurance stores, payday loans are a one-way trip to the poorhouse.

Christopher A. Hopkins, CFA, is a imperfection president at Barnett & Co. in Chattanooga.

Source: Chattanooga Times Free Press