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Payday Lending is a practice that targets the most vulnerable members of society--those who are living from one paycheck to the next. Normally located in low-income neighborhoods, or near military bases, payday lenders typically offer loans of up to $1000 against future paychecks. Advantage Credit Counseling Service (ACCS) always advises its customers to avoid payday loans.

 

Payday loans can rapidly turn into an endless cycle of debt. Why? For example, a typical consumer might authorize an automatic withdraw for $230 to borrow $200 for two weeks (usually their next payday). The actual cost of that loan is $30, or an annual percentage rate (APR) of 390%. For comparison, some of the higher APRs on credit cards are less than 24%, and Pennsylvania law already caps small loans at approximately 28% APR (Source: Pennsylvania Public Interest Research Group).

“Payday loans are never the answer, ”says Freya Fridy, an ACCS Counselor. ”Every month the interest builds, and so the person finds that their next paycheck is mostly gone! That means they will need to borrow more, and they start to fall behind again.”

Other sobering statistics about payday lending:

Ninety-nine percent of payday loans go to repeat borrowers who are unable to meet their impossible terms, and so are trapped in debt at 400% annual interest rates (Source: Center for Responsible Lending).

The average borrower was flipped eight times by a single lender and paid back $800 for a $325 loan (Source: Pennsylvania Coalition for Responsible Lending).

The average Pennsylvania payday borrower pays $800 to borrow $325 (Source: Pennsylvania Coalition for Responsible Lending ).

The Department of Defense lists payday lending as one of the top ten key issues impacting the quality of life of U.S. soldiers (Source: Center for Responsible Lending).

 “Isn’t payday lending illegal in Pennsylvania?”

In March 2006, it looked as though attempts by the FDIC and the Pennsylvania Department of Banking to eliminate payday lending were successful, and that the practice in Pennsylvania had finally come to an end.

 

Advance America, the largest payday lender in Pennsylvania-with more than two dozen locations in the Pittsburgh area and 101 statewide-declared that it was officially ending its payday lending operations in Pennsylvania.

 

Unfortunately, in June 2006, Advance America resurfaced with a new product, called the "Choice" line of credit. The company now charges a $149.49 monthly “participation fee” supposedly for arranging consumer loans of $500 or less. This fee, when combined with the 5.98 percent interest rate on outstanding balances, means under this “new” program Advance America customers will still be paying a minimum APR of around 370%. The Pennsylvania Department of Banking calls it  "a really bad deal for consumers.”

 

There are many alternatives to payday loans such as: small savings accounts or rainy-day funds; salary advances from employers; credit card advances; working out extended repayment plans with creditors; and loans from friends, relatives, religious institutions, or social service agencies. In addition, many lenders have developed lower-cost alternatives to payday loans that have better repayment terms. ACCS recommends that consumers try to find a way to use an alternative method, rather than a payday loan. The chart below, created by the Center for Responsible Lending, illustrates more clearly that almost ANY other method will be more advantageous for a person in need of immediate financial assistance:

 

 

$255 payday loan                                              $903                          91%

$255 bounced check                                        $43                           202%

Late fee on $255 credit card bill                     $30                           141%

Late fee on $800 mortgage (homeowner)   $32                            48%

Late fee on $600 rent payment (renter)        $30                            60%

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